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How real estate can chart a steady course for uncertain times

Jul 25, 2022

Planning for the future can seem daunting when so much in the economy — and in real estate — is in flux. And these are particularly unsettled times.

Interest rates are climbing along with median real estate prices. Office space needs are in limbo. Housing shortages are worsening. On the upside, rents have rebounded in most commercial sectors. Demand for land is strong, and retail is in the midst of a reinvention.

But what will it take to repurpose vacant office space, which exceeded 12% at the end of last year, and continues to climb? More tax incentives? New lending programs? Other government funding?

Real estate is always adapting to change, which means you need to stay on top of best practices in your field. It may be tempting to shift business strategies when the possibility of a new tax plan or other sweeping legislation looms. And while it’s wise to monitor developments on Capitol Hill and in your own statehouse, it’s never a good idea to act precipitously.

Smart decision-making is never done reactively. The latest government proposal or stock market volatility can surely provoke an emotional reaction, but that should never be the basis for a business decision.

Meanwhile, a well-thought-out strategy that factors in systemic changes and longer-term trends will always set you up for success. Several phenomena have emerged lately that are already making an impact on real estate investment decisions and will surely grow in importance in the years ahead.

Environmental, social and governance

ESG is becoming a buzzword, but developing and communicating a commitment to social and environmental stewardship is becoming indispensable. No real estate firm can afford to look the other way on issues such as reducing the carbon footprint of their business or their assets. Similarly, climate resiliency needs to be a central discussion point in every real estate project. Extreme weather patterns have enormous implications for all segments of the real estate business.

Real estate investors are starting to ask fund managers what their ESG plans are. They are looking beyond ROI in their decision-making. And the last thing you want is to be caught unprepared with an answer. Diminishing or deflecting those concerns related to environmental well-being and the social good is likely to lead to missed opportunities or even a loss of business.

As for the social part of ESG, diversity, equity and inclusion have become guiding principles in all business practices. Companies committed to equitable, inclusive work environments win the war for talent. Shifting mindsets, behaviors and practices doesn’t happen overnight. But committing to these values matters at a time when people are more inclined to do business with socially responsibility organizations.

Mastering the data

Look at demographic and educational trends more closely for their long-term influence on real estate needs. Software tools exist to capture and analyze information that can guide real estate developer and investor decision-making. For example, medical office and research space has been a fast-growing area, but that pace of growth may be out of the sync with the fact that the number of medical researchers coming out of graduate school is slowing.  

The shortage of doctors and nurses in many places needs to be recognized in development plans even when the demand for healthcare services is high. Relevant industry and population data can inform decisions about the tenant pipeline for any proposed real estate project.

Workforce changes

The COVID-19 pandemic upended work as we knew it. It’s become clear that the labor force has undergone a seismic shift in two major ways:

  1. More have opted out of the workforce than ever. About 10% of people who are able to work are still on the sidelines two years after the onset of the pandemic. Some have felt unsafe about going back to work, particularly in service fields with long hours and low pay. Investors are keeping a close eye on the supply of construction workers as new projects are proposed.
  2. Office-based workers who became accustomed to working from home generally prefer to stay there. Having gotten accustomed to working from home offices or in co-working spaces near home, interest in in-office contact has waned along with the appetite for commuting.

No one knows how the office landscape will change in the long run, but what is clear is that you can’t rely on pre-pandemic growth and usage expectations.

The path forward for real estate success is building and maintaining strong, trusting relationships with your business network.  Bad news in the markets shouldn’t get you down. And the worst thing you can do is to act in haste. Adopting a flexible mindset along with the proper research can help you and your team find the right decisions.

When leadership articulates and executes a strategic vision for your firm, confidence growth and deals can move forward.

Let Wipfli help you plot a steady course

Wipfli can help you navigate real estate decisions during a time of dramatic market and economic volatility. Our advisors assist in guiding your strategic planning and assessing trends that matter most to your business. Making smart investment decisions requires thoughtful, proactive planning. We’re here to help you, your investors and other partners stay on track for the long run. Learn how we help.

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Author(s)

Cory Bultinck, CPA, MBT
Partner
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