Looking Ahead: Commercial Real Estate Trends for the Upcoming New Year

By
Real Estate Technology with Husky Marketing

For the duration of the pandemic, the outlook of the commercial real estate sector was bleak. Only a handful of niche markets escaped the COVID-19 pandemic relatively unscathed; industrial properties were supported by a boom in online spending, and the return to work has left office space far from obsolete. But for good reason, and for many months, industry observers, landlords, and investors were holding their breath. 

 

However, rapid shifts and unprecedented challenges in the commercial real estate sector ended up further proving the property market’s resilience, confidence, and adaptability. And as economic output is surging past pre-COVID levels, and jobs remain on track to reach previous levels in early 2022, leading industry professionals are preparing for adjustments made during the pandemic to persist well into 2022. 71% of a cohort of 1,200 respondents in an Emerging Trends in Real Estate 2022 report, believe that changes made are here to stay.

 

These changes in the market map across these three channels: Environmental Social and Governmental (ESG) standards, secondary market booms, and an office-place reset. Below is further information on these shifts and why they occurred.

 

ESG

 

2021 brought climate and social issues to a forefront. Wildfires, drought, record heat, and flooding made climate change a ‘now’ problem. The property sector takes up a whopping 40% of global energy use and has come under increased scrutiny for its environmental and sustainability practices.

 

This scrutiny has come in the form of ESG (Environmental, Social, and Corporate Governance); a measurement of a firm's conscientiousness in social and environmental factors. The real estate industry has embraced the new standards, and is turning towards it as a responsibility. In a survey,  82% of respondents consider ESG in operational and/or investment decisions.

 

The broader real estate ecosystem is integrating ESG into their considerations as well. Major credit ratings agencies are using ESG factors in their system, as indicators of financial stability. ESG as a financial indicator gives an insight into credit risk, evaluating a commercial real estate firm on 8 key points:

 

  • Carbon and Greenhouse Gas Costs
  • Climate and Weather Risks
  • Emissions, Effluents, and Waste
  • Social Impact of Products
  • Human Rights
  • Product Governance
  • Data Privacy and Security
  • Transaction Governance

 

As incentives compound for tenants, owners, operators, and investors, ESG is positioned to be an enduring part of the new normal as well as an investor advantage—for good reason—in the coming year.

 

Secondary Markets

 

Considering the following top performing real estate markets, a trend becomes evident: 

  1. Nashville, Tenn.
  2. Raleigh/Durham, N.C.
  3. Phoenix
  4. Austin, Texas
  5. Tampa/St. Petersburg, Fla.
  6. Charlotte, N.C.
  7. Dallas/Fort Worth
  8. Atlanta
  9. Seattle
  10. Boston

 

‘Secondary and tertiary markets are winning,’ says Zain Jaffer, CEO of Zain Ventures, an active investor in a variety of real estate initiatives across the US. ‘Quality of life and tax friendly-for-business states coincided with a mass exodus out of cities.’ 

 

A rebound back to major markets such as New York, San Francisco, and Chicago is afoot. But the markets listed above are now here to stay, and worth watching. Investors are exploring these sectors with less competition, higher returns, less volatility, and greater value-add opportunities. Overseas investors are also increasingly targeting these safer bets, instead of coastlines and major metropolitan areas.

 

Working From Anywhere: An Office Reset

 

COVID-19 has put a permanent dent in the office space sector of commercial real estate. This sector has seen the largest drop in transactions. A hybrid work model will persist into 2022, shifting the demands in the market. ‘Demand for space is dropping,’ Jaffer says. ‘Meanwhile, demand for quality has increased—proper ventilation, access to outdoor space, green energy solutions, and other relevant add-ons.’ In the next three years, industry leaders predict a 5 to 15 percent decrease in office space utilization due to the rapid onset of remote work. 

 

In a study conducted by CBRE,  87 percent of large companies with 10,000 employees or more are adopting hybrid work, such as companies such as Google that are ahead of the curve by designing their work spaces as fluid cultural hubs. We are expecting a rise in renovations and construction costs coming into 2022, as commercial investors scramble to meet the new interior demands.

 

Reasons for Optimism

 

Economic output has already eclipsed pre-COVID levels, and is projected to grow even further into 2022 and 2023. ‘This pandemic has strengthened investor confidence in the resilience of the commercial real estate market, with even retail showing strong signs of recovery amidst a boom in digital commerce’ says Jaffer. ‘The recovery presents a great and profitable opportunity for investors.’ ESG continues to prove itself to be a positive financial indicator, and secondary/tertiary markets are taking their rightful place in the landscape. Finally, an office reset is ushering in a new hybrid form of productivity. With these factors considered, commercial real estate investors will see a profitable, surprise-free 2022.

 

Comments (1)

Kristin Johnston - REALTOR®
RE/MAX Platinum - Waukesha, WI
Giving Back With Each Home Sold!

Great information.   Thanks for sharing and have a wonderful day!

Feb 01, 2022 07:16 AM