Building a real estate strategy for 2023
Many factors will affect how real estate — both commercial and residential — will perform in the year ahead. Inflation, higher cost of debt, supply chain issues, the war in Ukraine and other geopolitical events could all play a role. But the scope and scale of those impacts can be hard to gauge.
Some pandemic-related shifts — like increased remote work, strong e-commerce activity and other robust technology adoption — continue to influence the real estate industry, causing investors, developers, owners and buyers to take a thoughtful and smart approach to their activities.
Where cheap money exists through vehicles like municipal grants, tax credits and deprecation, developers will need to keep finding ways to keep deal flow moving forward by reducing risk where they can. But many may opt for a wait-and-see approach in 2023. There are ample reasons for cautious optimism as hiring remains strong in many sectors and many workers enjoy the flexibility of earning their livelihood though the gig economy rather than traditional corporate paths.
Whatever recession impact lies ahead, it may be less severe and widespread than many headlines suggest.
These real estate trends may affect your business in the year ahead. Here are ways to get prepared and build the strategy you need:
1. Take advantage of energy-efficiency incentives
Each year, pressure is growing for more regulations concerning energy-efficiency requirements. Decarbonization initiatives around older buildings may involve higher costs, and due diligence needs will be higher when it comes to assessing the financial impact of future climate-related regulations. Keeping ahead of these requirements will ensure that new projects will maintain value over time.
Expanded tax deductions for energy-efficient buildings included in the recent Inflation Reduction Act (IRA) are creating strong incentives in both development and redevelopment of existing buildings. Understanding the various aspects of the IRA will be an essential aspect of getting ahead of green building regulations and doing so cost effectively.
For instance, when installing qualifying energy systems into buildings, the law raised Section 179D’s maximum deduction value from a maximum of $1.80 per square foot to $5.00 per square foot (subject to an annual cost-of-living adjustment).
It also offered a complementary opportunity for residential buildings by extending and expanding the Sec. 45L federal tax credit. However, since the maximum deduction is not guaranteed, getting ahead of what qualifies for the various credits and deductions is essential when putting together your building plan.
2. Go on the offensive with your data and technology tools
Real estate firms that have invested in technology that promotes transparency and efficiency by providing clear, real-time data to clients are gaining an edge. Investors appreciate the improved visibility of information which increases their confidence. The spending on these platforms is showing its value and helps those groups stand out from the crowd who are still dependent on spreadsheets and other static tools.
The rise of the financial dashboard is appealing to investors who may be leery of contributing cash through a real estate partnership without real-time access to financial performance data about the project or fund. This type of software, such as Juniper Square, helps investment partners connect and communicate seamlessly across every interaction through the cloud.
Tools such as AppFolio give investors the full picture instantly of a project or investment that informs their relationship with investors. While the largest developers and asset managers have taken the lead in incorporating these portals into their business, they are on their way to becoming standard at firms across the continuum. Expect to see more smaller developers participating as familiarity grows along with investor expectations for access.
Additionally, growing security risks in business are creating a greater push for broader technology adoption. This could include a data security assessment of back offices to ensure data is secure to an assessment of how businesses have access and greater visibility virtually to projects in other states.
Thus, 2023 will be an excellent time to assess whether your business is operating at its optimal capacity.
There are several questions you could ask yourself:
- Are my investors happy with the information they are receiving and how they are receiving it?
- Do I have access to reliable data in real time or is the project manual?
- Do I know my investor and project data is secure from hacking?
- Who has access to my physical projects and how often is that reviewed?
- Can I tell how energy-efficient each of my buildings are?
3. Evaluate whether to prioritize redevelopment over development
Deals are more likely to involve repurposing of space rather than new construction. The office and retail sectors are good examples of this trend. In searching for opportunities, focus on properties built for office or retail which may be ripe for conversion into industrial, warehouse or multifamily uses. Existing office lease flexibility is ongoing. Leases are being renegotiated, and shorter terms can benefit both tenants and property owners seeking greater options and flexibility with spaces.
4. Incorporate live/work/play concepts into your housing developments
The changing demographics have revealed an important real estate opportunity. The aging population has stirred strong demand for senior living communities. The appetite for new housing options, with amenities and ancillary services for retirees, is outstripping supply and creating a bright spot in the development targeted at the 55+ crowd. For their part, the younger crowd is looking for communities rich in living, working, dining out and entertainment spaces all within a single area. Little appetite exists for long commutes.
5. Incorporate new retail trend concepts into your tenant management plans
Consumers may be returning to stores since the pandemic but not necessarily to load up on merchandise.
The value of the brick-and-mortar retail outlet may be more about promoting brand awareness than point-of-sale purchases. Stores themselves are becoming cultural experiences that seek to create a connection with consumers, perhaps even with an entertainment component. Such visits are a means to reinforce online sales. The goal is for consumers to recognize the brand when they are ready to shop and spend online. By extension, the physical footprint of stores can be reduced since the goal is not to carry a huge amount or variety of in-store inventory. Expect square footage needs to continue falling.
It’s important for developers and real estate brokers to determine how to optimize the use of the space for the best value for both the building owner and the tenant long-term by creating an experience for the tenant’s consumers.
How Wipfli can help
The uncertainties in the current real estate market reinforce the value of working with professionals who can guide you with credible knowledge and perspective. Our seasoned real estate team can help turn obstacles into opportunities. Whether your questions involve tax, compliance, process, people or technology, we can help you achieve your strategic goals.
Learn more about Wipfli’s real estate services.
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