As we enthusiastically slam the door on 2021, hopes that we would be doing the same on COVID-19 have dwindled. Omicron and Delta have corrupted the near-term outlook as mask mandates, vaccination, and social distancing requirements continue to impact commercial gathering spaces.
As you know, the commercial real estate (CRE) industry is spearheading the recovery:
- Office employers are learning to balance output and safety.
- Retailers continue to contend with critical crossroads in an already evolving industry.
- Residences are competing for quality tenancy amid unpredictable migration patterns and intensifying affordability concerns.
Meanwhile, businesses face increasing pressures to prioritize environmental, social, and governance (ESG) issues, outdated technology infrastructures, a tensing labor market, and an influx of competition. All this to say: how the CRE industry proceeds with 2022 still as an embryo could underpin its success over the next several years.
Now, without further preamble, I give you the biggest risk factors facing CRE in 2022:
Geopolitical Risk Vis-à-Vis Supply Chain Disruptions
Translation? Rising tensions with China and the fact that they make just about everything we consume can’t be great. Be prepared for the ripple effects of the economic slowdown and rising oil prices to be keenly felt in the CRE space. Construction delays may worsen, having obvious adverse impacts on the stakeholders of construction projects.
Moreover, this breed of supply chain disruption typically causes economic hardship for global logistics firms and producers of multinational goods. This reduces office demands for those firms. Additionally, the inflation-induced economic slowdown that makes interest rates rise faster than anticipated could inhibit investments in the commercial real estate market. This brings us to our next point:
Interest Rates
Based on where inflation stands now, make no mistake: interest rates will rise this year. The Fed may start raising rates as early as May or July of 2022, which far predates previous predictions of interest rates stagnating until 2023. Interest rates linked to inflation are not by definition alarming, but I know we all hope rates will rise in an orderly fashion by less than a full percentage point. Somewhere between 2% to 2.5% can be good, but we don’t want gigantic moves.
Economic Inequality and Civil Unrest
What numbers are indicative of a sincere trend and can be used for business planning purposes? Which are just smoke and mirrors from the low, low bottom of the 2nd quarter of 2020? Which behavioral changes made by households during the dawn of the pandemic will last into mid-decade, and which will become obsolete once we reach a feeling of normalcy again?
No one knows. Sorry.
Additionally, riots, vandalism, and social unrest present increased risk for commercial real estate owners, managers, and developers across the country. The risk of physical property damage, business interruption, and civil authority has been heightened since 2020 and will only continue as the nation’s divide deepens. Going into 2022, ensure you have a plan in place to mitigate the risks posed by exacerbating social unrest.
Climate Change and Infrastructure
Amplification of unforeseen weather patterns is taking its toll on the CRE industry. The pandemic, climate change, and heightened interest in economic equity have reformulated infrastructure imperatives beyond the need for better roads, bridges, airports, and mass transit.
As the need for electrification and renewables grows, significant infrastructure investment in the electric grid is inevitable. Additionally, commercial real estate buildings, which consume about 40% of total energy use, and water systems, must be made more energy-efficient. Neighborhoods that embrace electric buses, rail, and other rethought forms of mass transit will be less polluted, quieter, and more desirable. CRE located near charging hubs and providing charging opportunities will be richly rewarded. All real estate owners who become bullish about these changes will not only reduce their costs of adaptation but also profit hugely in the long term.
A Divided America
I’m not here to pick sides: doing so only throws gas into the fire. I will say, political friction is holding back America’s productivity.
Pre-pandemic, real estate was already feeling the pinch. The National Association of Home Builders has harped on our broken immigration system and how it has hamstrung the production of housing, delaying deliveries and skyrocketing prices. Building service workers are calling for an immigration approach facilitating immigrants’ full participation in the economy as an immediate priority. Many types of CRE, including hotels, restaurants, personal, medical offices, and more have high levels of immigrant workers in their occupancy profile.
The present tribalism of American politics is a preeminent issue for real estate now and in the foreseeable future.
The Bottom Line
After two years of global disruption not seen in generations, the CRE industry is at a precarious point of inflection. Will optimism prevail? Which way it goes is anyone’s guess.
