Uncertainty Clouding Enthusiasm From Commercial Real Estate Owners and Investors Heading Into 2023

The pandemic's effect on the commercial real estate industry and subsequent upheaval has contributed to a seismic shift in how buildings will be used, valued, bought and sold in 2023. And relative uncertainty surrounding the possibility of a global recession could further impact an already volatile industry.

Two new reports, one from consulting company Deloitte and another from the annual Allen Matkins View From the Top, paint an uncertain future for commercial real estate (CRE) owners and investors heading into 2023. 

Deloitte surveyed 450 chief financial officers of significant commercial real estate owners and investors worldwide to capsulize their opinions about commercial real estate organizational growth and their plans for the workforce, regulatory compliance and technology as well as investment priorities and anticipated changes in 2023.

For the 15th year, the Allen Matkins View From the Top brought together top real estate economists, owners, investors, developers and brokers in the commercial real estate Western Region. The goal is to remain an essential source for commercial real estate market trends and predictions. 

Deloitte Study Finds Dampened CRE Optimism

Deloitte’s study found a less-than-optimistic response to questions regarding revenue expectations for 2023. The results were, at best, mixed among those surveyed, with 40% saying revenues should increase and slightly less than half predicting revenues will decrease. A total of 12% predicted no change from 2022. Last year, the survey saw 80% expecting revenues to increase. 

The consulting firm’s survey respondents pointed to sustained high inflation, workforce management, cyber risk and climate regulatory action as issues that will impact revenues most over the next 12 to 18 months. As a result, most did not think the CRE industry is fully prepared to respond to some uncertainties. 

At the View From the Top, Michael Van Konynenburg, president of Eastdil Secured, said that although capital markets “have been choppy, the positives outweigh the negatives in today’s environment. With increasing replacement costs, growing rents, a robust job market, strong balance sheets, limited overleverage and high liquidity ($4.1 trillion on deposit at the Fed), commercial real estate is well-positioned for strong momentum in the second half of the year (2023).” 

He also reminded those in attendance that CRE performs well in a rising rate environment.

At the same event, Robert Paratte, executive vice president of leasing and business development at Kilroy Realty Corp. in Los Angeles, said businesses no longer base their leasing decisions solely on rental costs. Improvements and concessions now play a crucial role.

“Tenants have more questions beyond rental rates, like, ‘What does my labor force look like? Where do I want to be located? Is my space ready to go?’ There will likely be more dynamic pricing on a lease-by-lease basis rather than sweeping rate cuts,” he said.

Rising Interest Rates Forcing Investors and Owners to Wait and See

With high-interest rates likely to stay with us through next year, experts on View From the Top’s Major Western Region Leasing Markets panel said they expect in the next six to nine months there should be more clarity. But until employees come back to the labor force on a regular basis, companies aren’t making decisions.

The Deloitte study pointed to the cost of capital, capital availability, property prices, vacancy levels, leasing activity, transaction activity and rental rates still leading to a positive outlook by most respondents (66%). They said leasing activity, tightening vacancies and rental growth will have the most substantial potential for improvement next year. 

But the Allen Matkins conference showed very little enthusiasm around obsolete older buildings lacking in technology, believing there are significant buying opportunities available primarily for newer buildings.

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