The commercial real estate industry has had varying impacts in the past year due to economic and geopolitical conditions. To stay resilient despite the unforeseen changes, Global real estate leaders have become cautious with their 2023 operating plans.
According to a survey conducted by Deloitte, only 40% of real estate businesses expected to finish 2022 with higher revenues than last year, and 33% expected to cut expenses.
While active measures to avert a Global recession are underway, stagflation continues to persist in the real estate sector due to heightened instabilities and disruptions brought in by the prolonged pandemic. Therefore, Global real estate is increasingly shifting its focus from organic growth to building strategies and addressing the changing business environment. The real estate industry is now seeking to move beyond what it perceives as headwinds — i.e., rising interest rates, declining GDP, sinking deal flows — and taking a long-term approach to building real estate assets.
Strategies that need critical re-assessments
The level of uncertainty has changed the competitive landscape of the commercial real estate sector, making it crucial for businesses to develop a clear and consistent strategic plan that positions them best to meet unique needs. However, factors such as high inflation, workforce management, cyber risk, and climate-related regulatory action are most likely to impact revenue prospects for the next 12–18 months.
Inflation remains one of the key risks to the financial performance of the real-estate sector. Presently, wage growth is outpacing inflation and firms are bracing for higher wage-related costs such as healthcare and changing taxes. As the industry reshapes itself, there will be ample opportunities for real estate companies of all sizes to redefine their business models and strategy and align them to the best of their advantage.
Additionally, actions affiliated with ESG are crucial for real estate businesses, but most firms need guidance on implementing changes and monitoring progress. As per a recent analysis by Deloitte, only 12% of the total industry surveyed and 17% of the required public REITs are prepared to respond to regulatory actions. Furthermore, investors are willing to challenge companies on their climate performances, making it crucial for the real estate industry to act on its ESG-led strategies to meet the expectations of regulators and investors. By turning ESG theory into meaningful action, CRE companies will be able to create sustained outcomes that drive value and fuel growth, while strengthening the environment and societies.
Another concern is the burden put on human resources due to changes in an uncertain market. Businesses in the industry have struggled to develop and sustain a talent pool to outperform them during this boom cycle. Aggressive businesses need to actively search the market for people who will make a difference and offer them an advantage that allows them to profit from the expansion of the industry.
In line with this, firms are now focusing on increasing workplace automation, bolstering Diversity, Equity, and Inclusion initiatives, accelerating career growth opportunities, and offering more recognition and awards programs.
The growing dynamism of the real estate industry is also driving shifts in seeking outsourcing opportunities to optimize operational capacities. Other concepts that need attention include enhancing vendor relationships, utilizing technology to increase efficiency, and executing corporate governance programs to strengthen internal controls.
Navigating the challenges that lie ahead
The commercial real estate industry continues to experience growing pains and volatility. Whilst real estate developers are upbeat about the performance of CRE in 2023, this is the time for thought leadership and creative thinking to navigate any upcoming challenges and focus on strategies that take advantage of demographic gateways and tap into changing consumer demands.
Real estate is an investment asset and requires careful consideration when looking for funding. Investors will need to consider how to allocate resources, plan strategies, and make smart investments. They will have to give the value that ESG regulations can add to their business decision-making.
Currently, the commercial real estate industry is on an unknown trajectory. As the industry navigates its way in the post-pandemic era, a global recession could have several direct and indirect repercussions on the market. CRE companies are at a strategic point where they must adopt new measures and develop agility and adaptability. Leaders need to be proactive and embrace innovative ways of doing business—ones that take advantage of the latest digital technology and fuse traditional research and analytics into a modern risk-management toolkit while ensuring compliance.
Views expressed above are the author’s own.
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