It seems the real estate industry is changing faster than ever in recent years, and 2022 was no exception as the market continued its adjustment to post-pandemic norms, furthered its progress toward increased diversity and environmentally-friendly practices, and began to brace for a likely economic downturn.
With that in mind, we asked Antenna Group’s Spaces team to weigh in on how the market may continue to shift in the year ahead. A few of the most compelling responses are included below.
What trends do you predict will take hold in 2023? Drop us a line to continue the conversation.
1. Rising Interest Rates and Looming Recession = Choppy Markets
Turns out that reopening an economy that was abruptly shuttered because of a global pandemic is harder than many policymakers anticipated. Three years later, real estate will continue to feel the repercussions as central bankers around the world and the Federal Reserve, in particular, struggle to orchestrate a soft landing for an economy that ran hot because of various stimulus measures and bottlenecks.
If inflation was the main fear in 2022, going into 2023, market participants in real estate are preparing for a recession, even as the debate among economists about whether we are currently in a recession remains unresolved. The impact of macroeconomic contraction on commercial real estate would be wide-ranging, including higher unemployment, lower rent collection, higher vacancies, and falling property values.
Once interest rates peak, the current gap between buyers and sellers, and the resulting market freeze (lack of transactions) will dissipate, with property prices resetting at a lower level. We predict the market will find equilibrium sooner than many realize.
While not great for property owners, declining property values (particularly home prices) could pave the way for sustained and broad-based economic prosperity as more middle-class households finally become able to purchase their first homes.
The silver lining of a recession is that inflation may ease, which would translate into lower construction and a plethora of other costs, and lower operating expenses for property owners. Moreover, higher unemployment would ease the difficulty real estate owners and investors have had recruiting and retaining talent.
– Marynia Kruk, Director
2. Heralded by a Slew of Recent and Upcoming Legislation, the Industry’s ESG Reckoning Is Hitting a Peak
While players across the real estate sector have been increasingly focused on expanding and refining environmental, social and governance (ESG) goals and strategies in recent years, the industry’s reckoning with assets’ subpar environmental and social performance is likely to reach a boiling point this year (pun intended) as the climate crisis necessitates immediate action and fosters growing ESG demands from investors and other stakeholders.
A recent Global Risk Report from the World Economic Forum cited “natural disasters and extreme weather events” and “failure to mitigate climate change” as two of the top five severe global risks to address over the next two years. This signals that the climate crisis must be considered not only an obvious environmental concern, but a top economic priority, especially for stakeholders in a building and construction sector that is both responsible for roughly 40% percent of global emissions and highly susceptible to extreme weather events.
In light of the current landscape, both the SEC and local municipalities have begun to enact legislation and regulations directly addressing ESG performance in the real estate sector, such as NYC’s Local Law 97 and enhanced federal reporting requirements. Looking at the year ahead, this legislation will force the industry to transform commitments into action, while being careful to avoid the same superficial and ineffective activities that have landed numerous organizations under fire for “greenwashing” over the past decade.
Increased demand for action will also be placed on asset classes that were previously more avoidant of ESG concerns. Take, for example, the industrial market, which has struggled to address sustainability performance with a triple-net lease model. As such, innovation in ESG strategy, tenant-owner partnerships and clean technology deployment will be crucial to ensure active, consistent progress across all property types and geographic regions.
– Isabella Sarlo, Account Supervisor
3. The Future of the Office Is Suburban
This past year, companies across the country faced difficulty encouraging employees to return to their city center offices. As we move into 2023, employees will continue to seek shorter commutes to offices conveniently located near their communities, while companies look for flexible lease terms and adaptable workspaces to accommodate their employees’ changing needs. With these demands, suburban office destinations may become the workplace environments of choice for many companies.
Suburban offices represent a stark contrast to their city counterparts, where empty offices lead to the closing of street-level businesses that depend on daytime worker foot traffic. Many of the older city buildings are due for renovation and lack the latest amenities necessary to attract talent. Suburban offices with flexible lease terms and attractive on-campus amenities, such as dining, retail and entertainment, will become increasingly popular as companies recognize the benefits of a destination office where every employee’s needs can be satisfied at their place of work.
– Ayelet Ehrenkranz, Account Executive
4. The Retail Industry Is In for Accelerated Store Closures
The retail industry has taken some hits over the past few years, fighting against headwinds like the growth of e-commerce and the COVID-19 pandemic. The recent holiday period is yet another example, serving as somewhat of a last hoorah for the consumer, with heavy discounting driving consumption. People opted to buy gift cards or give cash rather than presents, allowing for more spending over a longer period of time.
Going into the new year, brands will compete fiercely for consumers’ limited funds as inflation persists and a potential recession lies ahead. Expect to see all sorts of upheaval in the new year, from a wave of bankruptcies to surviving brands restructuring their retail real estate portfolios and closing underperforming stores. But it won’t be all doom and gloom for some big box retailers. Brands like Barnes & Noble are expected to defy conventional wisdom and implement major expansion plans in the new year.
–Mackenzie Martin, Director
Have our previous predictions come to fruition? Catch up on our Trends to Watch posts from the past three years to see:
Four Real Estate Trends to Watch in 2022
Four Real Estate Trends to Watch in 2021
Five PropTech Trends to Watch in 2020