BY Clifford Rooke Managing Director of Real Estate for Bank of the West

Jun 13th 2022

Financial PerspectivesIndustries

Three Ways to Navigate the Shifting Real Estate Environment

Jun 13th 2022

Smart real estate developers know the best moves are often made during a changing environment. In that case, there’s no time like the present.

Despite the pandemic, inflation, rising interest rates, uncertainty driven by international conditions, and more—the 2022 US real estate outlook is ripe with opportunities. The CBRE Group predicts increased demand for commercial real estate investment across all property types. And the Federal Reserve Bank of San Francisco reported that the residential real estate market in the bank’s regional district had increased robustly in January and February of 2022 and remained strong through March.

In fact, CBRE expects 2022 investments in commercial real estate to increase from 5 to 10 percent over 2021, which would be equivalent to pre-pandemic levels. Industrial and multifamily properties, in particular, are expected to see the most investor interest, as e-commerce expansion and population migration fuel the need for more warehouse space and higher interest rates price-out buyers for single, detached homes.

In light of the evolving real estate landscape, here are three ideas to help developers capitalize on this hot market even as interest rates jump:

1. Be wary of overbuilding

With people working from home and ordering more and more of their supplies online, the demand for warehouse and logistics space has surged, and the supply chain issues prompting manufacturers to store more goods are only pushing that demand higher. CBRE estimates that 1.33 billion square feet of new space will be needed in the US by 2025.

But given the ever-changing environment, real estate developers should be wary of too much supply in areas such as logistics, multifamily, single-family rental, and life sciences, advised Ken Rosen, Chairman of the Berkeley Haas Fisher Center for Real Estate and Urban Economics, in a recent Bank of the West-sponsored webinar. “There’s a lot of building taking place. We haven’t really talked about supply in a long time, but we need to watch that, especially if we get another recession,” he said.

“There’s a lot of building taking place. We haven’t really talked about supply in a long time, but we need to watch that, especially if we get another recession.”

—Ken Rosen, Chairman of the Berkeley Haas Fisher Center for Real Estate and Urban Economics

What does this mean for real estate developers? Rosen suggested that there might be opportunities to reposition “stranded assets, B and C properties, central business districts, office properties, and outdated retail properties.”

In other words, new builds aren’t always necessary or advisable. Real estate trends and consumer behavior could shift quickly depending on economic swings and other factors, so it’s important to consider all potential new build projects with an eye on the long-term.

2. Repurpose property to meet new demands

Remember when excess retail space became an issue because people discovered the convenience of online shopping? It’s no wonder, then, that the pandemic-fueled e-commerce boom caused that trend to pick up some serious steam. Now there’s even more unused retail space in the US.

“The biggest challenge for the retail sector remains how to repurpose all the excess space,” states the Urban Land Institute and PwC in their report, Emerging Trends in Real Estate 2022. “Despite some recent gains, the future of department stores is even darker than it was before the recession. And their fate is inextricably linked to that of the many obsolete secondary malls littered throughout the country.”

“The biggest challenge for the retail sector remains how to repurpose all the excess space.”

—Emerging Trends in Real Estate 2022, Urban Land Institute and PwC

Bank of the West’s commercial real estate team has worked with developers facing—and finding ways to overcome—this challenge. One client, for example, realized it had tremendous hidden value in mall parking lots. They chose to repurpose that land, knocking down retail to build much-needed housing and office space instead—capitalizing on demand for mixed-use developments in their market. Another client worked with the bank to come up with a plan to turn empty office space into apartments where there was a significant need for them.

The commercial real estate team helped these clients see the value of what they owned so they could get funding for innovative future development projects, including the use of prefabricated building blocks, which are cutting costs and speeding up completion times. Guided by a strategic assessment of their plans, developers can find previously unseen opportunities to shift from legacy property uses to those in demand in their current market.

3. Use ESG to attract prospects and ease supply chain issues

A competitive rental market has increased interest in environmental, social, and governance (ESG) initiatives, which are attractive to tenants and investors as differentiators in the market. Real estate lenders can improve their portfolio values by publicizing their ESG vision.

One example is green leasing, where tenants agree to follow sustainable guidelines like waste reduction. Buildings with green leasing practices can command premium rents, according to the Deloitte Insights 2022 Commercial Real Estate Outlook, and sustainable properties more often lead to more satisfied tenants.

The report also noted that 60 percent of survey respondents “believe that ESG initiatives are driving new business opportunities for their organization.” Half of the respondents believed the initiatives gave them a competitive edge.

ESG initiatives can help with supply chain problems, too. Construction costs are up 17 percent, “the most ever in history,” said Rosen. “I think this is going to slow down, but (for now) it’s labor shortages and supply chain interruptions.”

Turning to more sustainable construction materials like timber—which ESG-minded developers often use instead of concrete and steel—could address supply chain issues and ESG goals at the same time.

The bottom line? There are big opportunities in today’s real estate market for savvy developers that are open to innovation. But to make the most of them, they need a lending partner with the expertise and experience to advise them not just on the major trends in e-commerce, population migration, and ESG initiatives happening right now—but on how they’re likely to change tomorrow.

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