Last year, we published an article about the trends to expect for PropTech and the built environment. This year, we enlarge our scope, and take a look at residential and commercial real estate, PropTech and ESG trends in four separate articles in this 2023 Under Spotlight series!
This article from the series will summarize everything we have learned about commercial real estate from market reports, industry events, podcasts, webinars in 2022, and bring projections for the 2023 market:
- Global: The first half of 2023 will continue suffering from macroeconomic struggles. Only 40% of office landlords expect revenues to increase in 2023, down from 80% in 2022. Still, the initial market shock has now eased, and we will see investments rebound stronger and faster than expected.
- USA: 55% of US-based commercial real estate leaders expect a further recession in 2023; which will make them focus on strategic acquisitions or maintaining a steady state since only 47 percent of offices are occupied across the nation as of 2023.
- Europe: The European commercial real estate market will show continued resilience, growing approximately 5.55% until 2027; making 2023 another busy year of transaction and development activity in store especially in Germany, the UK, France and Sweden.
01 The Global Market – The Office Is Not Dead
2022 proved that occupancy in office buildings will hardly return to pre-pandemic levels, with the rise of work from home, work from anywhere and freelance work. Accordingly, the future of office buildings remains blurry on a global scale.
This will not change drastically in 2023; with inflation being near 40-year highs, feeding the steady increase of interest rates and energy costs. The percentage of increased costs passed on to customers is fluctuating from 25 to 75% globally, causing companies to lean into optimizing floorspace with flexible office solutions or stagnate growth to keep the cash flow stable.
In the post-pandemic world, however, this doesn't mean that we're living in an 'office is dead' reality; since office jobs still make up 35% of all new jobs created globally. Instead, the old ways of operating the office space are long gone – as customers want to pay for not only the office space, but for the experience and convenience it brings with valuable amenities and digital enablers. This can be observed in the rise of Class A office building costs, selling at US$50 more per square foot (15%) than pre-pandemic times, 9% more than Class B buildings, a Deloitte study finds.
According to Cushman & Wakefield senior leaders, “The future of offices will be driven by the ability to create spaces and places where employees want to be, are productive, and have options to connect, innovate and get all types of tasks done efficiently. Well-capitalized landlords can create value by investing in amenities, services and experiences in and around their buildings,”.
02 The USA – The Dark Side of Office Leasing
The sky looks a bit foggier in the USA when it comes to the state of office buildings now, and tomorrow. Only about 47 percent of offices are occupied across the nation, causing an approximate 40% decrease in office buildings' value since 2020 to today.
With property taxes gained from office buildings making up one-fifth of the city's tax revenue in New York City, causing an approximate $5 billion revenue loss on one side; NYC buildings are facing the risk of being stranded for not complying with the green standards set to be reached by 2030. Similar trends are observed in other highly commercial cities such as San Francisco, Portland and Chicago; where the post-pandemic recovery level of business areas fluctuate between 30 to 40% only.
Repurposing and refurbishing office spaces as residential units is definitely a solution, but achieving that by complying with sustainability standards is more difficult than anticipated. This would require a major reconstruction with many more bathrooms and kitchens being built, and thus replacing the plumbing and electrical systems as well as other vital systems, causing even higher costs. As an example, only 3% of New York City office stock is viable for conversion.
What concerns the commercial market in terms of financial performance the most is the sustained high inflation and workforce management. Accordingly, 55% of US-based commercial real estate leaders expect a further recession in 2023; which will make them focus on strategic acquisitions or maintaining a steady state. Climate change, on the other hand, is viewed as the least important challenge to the economic stability in the specific geographic region.
03 Europe – Focus on Repurposing and ESG
Unlike the USA, climate change and related regulatory action in the commercial real estate sector is observed to be the biggest challenge by European leaders; and repurposing buildings has become a bigger trend than in the USA despite the costs.
Proving that, “There is no single discussion you will have with any peer in real estate that does not end up referencing ESG and decarbonisation,” says a European head of asset management on PwC's Emerging Trends in Real Estate Europe 2023 Report.
From a broader view, regardless of macroeconomic struggles, the Europe commercial real estate market is estimated to grow at of 5.55% between 2022 and 2027, increasing by USD 80.59 billion.
In 2022, among all the European office assets that have been transformed to serve a new purpose, 64% of them became residential units. In the next 5 years, this figure is expected to remain above 50%, keeping approximately 40% to mixed-used assets, and the rest to logistics and retail with Germany and France being ahead of the curve compared to their continental brothers.
In our estimation, these trends will shape much of the commercial real estate dialogs in real estate in 2023. We'll regularly update our audience on these trends as they come since the market is subject to change at all times!