RE-writing the game: Real estate considers its next move

Looking at the headlines, there’s no question that the real estate industry is facing a period of uncertainty. When will interest rates level out? How high will property insurance premiums rise? What will the fallout be from the multi-trillion-dollar “wall of debt” looming over the commercial and multifamily sectors?

Yet amidst the uncertainty, a silver lining emerges.

In the backdrop of this conference season, a collective resolve has become evident: to confront challenges head-on, to forge creative pathways, to wholeheartedly embrace the "new abnormal." This spirit of optimism, coupled with a pragmatic willingness to roll up sleeves and pioneer innovation, signifies a refreshing departure from trepidation.

Here, we recap some of the top concerns and obstacles that have taken center stage during the conference circuit this year – and ways that industry participants can or should be working to meet them.

The valuation conundrum

Across markets and property types, capital stacks are harder to put together than they were just a few years ago when money was cheap. Banks are more reticent to make new loans or refinance existing ones, and investors are rethinking their real estate allocations in light of relatively solid returns from much less risky investment options.

Although there are still bright spots, the escalating cost of capital is driving down values even in multifamily residential and industrial – long the shining stars of the industry. The lack of comp data is further fueling the general sense of uncertainty – which, in a vicious cycle, dampens transactional activity even further.

But one of the silver linings of this particular moment in time is that everyone is in this together: Stakeholders throughout the real estate value chain, from banks and investors to developers and operators, are all trying to come to terms with where the market is and where it’s going.

And the very fact that this industry is affected by all of these economic, fiscal, and monetary factors points to just how central real estate is to our economy. The risk profile of the industry has absolutely shifted, yet there remain plenty of risk-takers who are willing to join together to work through the changes needed for the industry to regain its footing and make it to the next up cycle.

In absence of major new legislation, tap funds from recent federal packages

While we are unlikely to see a sweeping federal rescue package any time soon – certainly not before the presidential election – there are still substantial dollars from recent legislation working their way through the system and into real estate projects.

The Department of Housing and Urban Development, among many other federal agencies, is putting funds to work from the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA). Many cities still have unspent money from the American Rescue Plan’s state and local fiscal recovery funds, which must be obligated to projects by Dec. 31, 2024. Many of these jurisdictions are actively looking for ways to deploy those dollars to address priorities such as the urgent need for housing.

In the absence of significant new federal action, states and cities are taking matters into their own hands by taking creative approaches to zoning, in some cases relaxing zoning restrictions to encourage more affordable housing or conversions from commercial to residential assets.

Property owners looking to explore asset class conversions can tap into different grants and programs, such as one from HUD. Although office-to-residential conversions are more challenging and expensive than many headlines portray, other types of office conversions are being undertaken nationwide,particularly in suburbs, where low-rise office buildings lend themselves well to being repurposed into senior living and hospitality assets.

Looking inward to drive NEW value

With so many external factors putting downward pressure on real estate values, real estate owners and operators are turning their attention to internal value drivers. 

• People first: One of the most significant and impactful ways real estate operators can effect change is by refocusing on people.
  
  Noam Kleinman, principal at real estate investment and development firm Foxfield LLC, put it well during a recent roundtable hosted by CohnReznick and DisruptCRE: 

"Everybody talks about the capital markets. The net operating income (NOI) is also an important component, and expense is an important component of the NOI. And what’s the biggest-ticket item you can actually control? It’s probably payroll. One of the things that has changed since the pandemic is the turnover of onsite employees is huge, and replacing them is extremely challenging. So anything we can do to make their lives a little bit more efficient and better, and reduce the amount of turnover, at the end of the day it affects the bottom line and improves the experience of the residents and employees. I’m always thinking about: Who are my stakeholders, and how do I check their boxes?"

• Driving efficiency: There is greater value today in thinking differently about internal issues, such as a company’s operating model and ways to use technology to streamline operations, reduce costs and environmental impact, and create positive experiences for those who live and work in these properties.  Whether it’s using chatbots to assist residents/prospects/tenants; employing automation tools to accelerate repetitive, manual work; or harnessing AI/Machine Learning to aid in decision-making, drafting a technology strategy that leans toward creating efficiencies will create a competitive advantage and allow your employees to focus on more valued-added tasks.

• For more on how industry leaders are revisiting their strategies and assessing technologies to improve the health and effectiveness of their operations, access our infographic.

• Assessing risk: There are a myriad of ways to look at risk within today’s environment. Internal risk, external risk, portfolio risk. Risk of doing nothing; risk of doing too much. It’s critical to evaluate which are most prevalent or pressing for your business, and make sure you have a strategy in place to address and mitigate them.

What will make it into your business playbook?

After the frenetic pace of the past few years, those in the real estate sector now find themselves with a valuable opportunity to pause and contemplate the essential factors at play. This juncture invites a thoughtful examination of the industry’s trajectory and the harmonization of its future direction. Concurrently, stakeholders including developers, owners, operators, and investors are engaging in a strategic introspection regarding their roles within the field. This self-reflection is driving a reinvestment in the fundamental aspects of their operations, laying a robust foundation for the times ahead.

What are you focusing on during this period of uncertainty? Are you making investments to strengthen the long-term value of your property, such as energy retrofits? Are you adding amenities to appeal to changing demographics?

Request a meeting with our team to discuss how you will be rewriting the real estate game for your organization.

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To explore more of our thinking on real estate industry trends, visit our Embrace the Movement resource center.