2023 commercial real estate outlook

The commercial real estate industry faces an uncertain 2023. Global economic volatility continues — with possible recessions or stagnation carrying significant impact on the financial services sectors. Deloitte’s 2023 Commercial Real Estate Outlook surveyed 450 CRE CFOs and investors for their insight into organizational growth and strategies for regulatory compliance, technology, and workforces.

What the survey found is that CRE leaders should:

  • Guide their real estate firms to develop innovative approaches to meet investors’, tenants’, and regulators’ evolving requirements.
  • Strategize their portfolio execution
  • Prioritize ESG (environmental, social, governance) to meet stakeholder and regulatory requirements
  • Commit to understanding recent and upcoming changes to tax structures
  • Rethink their approaches to talent acquisition, retention, and management
  • Leverage technology to innovate and improve efficiency

Keep reading for some of the report’s other key findings.

Revenue Concerns Driving Firm Strategy Reassessments

Top of mind for most global CRE leaders? Worries about the economy. This year’s results are less optimistic than last year’s revenue expectations. 

  • 40% of those surveyed anticipate revenue increases
  • 48% see revenues decreasing
  • 12% anticipate no change
  • 33% plan to cut costs compared to last year’s 6%

Other concerns potentially affecting revenues through 2023 and into 2024 include cyber risk, climate-related regulatory action, sustained high inflation, and workforce management. And many fear the industry lacks the full preparation it needs to address and thrive in the midst of these uncertainties.

Optimism About Real Estate Fundamentals

While they expressed reservations about near-term performance, respondents identified leasing activity, shrinking vacancies, and rental growth as the high potential motivators for improvement. Regarding real estate fundamentals including capital availability, cost of capital, leasing activity, property prices, rental rates, transaction activity, and vacancy levels, 66% of those surveyed expect 2023 to bring improved or at least stable conditions.

43% of North American CRE leaders identified logistics and warehousing spaces as a top growth opportunity whereas 35% of European CRE leaders identified suburban offices and 43% of Asia-Pacific respondents favored digital economy properties.

Regardless of which direction the CRE industry goes in 2023 and beyond, Deloitte recommends that CRE owners and investors should focus on strategic, asset-level decision-making.

Increased Focus on ESG Disclosure Requirements 

Compared to other industries, the CRE sector is still in its infancy regarding ESG compliance requirements. While most leaders plan to incorporate ESG data between 2023 and 2025, the majority of CRE organizations aren’t ready to comply with regulatory action.

  • 1% were not aware of recently passed or pending regulatory action that would impact their business strategy
  • 17% didn’t think recent/pending regulatory action would noticeably impact operations and hadn’t planned any changes or updates
  • 24% were aware of recent/pending regulatory action but lacked either the capability or data required for compliance
  • 45% knew about recent/pending regulatory action but were waiting industry-driven responses and further guidance before moving forward
  • 12% had planned for major regulatory action and were prepared to implement changes to ensure compliance

To facilitate compliance with reporting compliance, real estate companies must prioritize keeping abreast of changes and updates. Industry associations can step up to provide information, observations, and recommendations, and CRE leaders should ensure they focus on all three ESG elements, not just the “environmental” aspect. 

Keeping a Close Watch on Tax Regulation Trends

Next year will bring new tax policies worldwide, and the survey respondents have been keeping close watch on the trends including:

  • Increased tax rates
  • Changes to transfer pricing and profit-sharing
  • Enforcement automation

To prepare for upcoming changes, CRE leaders should champion and lead the way in increasing transparency into data requirements and reporting for automated regulatory enforcement. Also important? Identifying and incorporating any tax implications derived from ESG initiatives. Existing or soon-to-be enacted legislation could provide CRE organizations with tax benefits (like tax credits) for qualifying activities.

Shifting Employee Expectations

The employee market remains competitive, with workers capitalizing on remote work options, rising wages, and low unemployment rates. With the pandemic accelerating an increase on telework, CRE firms should recognize a trend that’s likely here to stay and take advantage, by sourcing talent outside the physical geographic location. 

Developing a robust understanding of employee expectations — and what workers value — will help CRE companies to recruit, hire, and retain well-qualified talent. Of those surveyed, over 40% plan to:

  • Enhance diversity, equity, and inclusion (DEI) initiatives
  • Add more health and wellness benefits
  • Offer remote-work options

Only about a third, however, plan to prioritize workplace updates, implementation of flexible schedules, or offer more opportunities for skill and professional development.

Not The Time to Cut Tech Spending

Last year’s survey found more respondents planning to increase technology spending but looking ahead to 2023, 25% of North American CRE companies plan to cut or cap technology spending (as opposed to 7% cutting spending last year). While trimming budgets during uncertain economic times makes sense operationally, opting not to invest in technology could prove short-sighted as the world becomes increasingly digital and technology can drive potential over the long haul.

For example, partnering with a third-party vendor could free up CRE teams to focus on enhancing their core services. Property technology companies and external service providers offer more support to existing operations, helping differentiate CRE firms from each other. With 80% of respondents exploring emerging technologies, like the metaverse, smart contracts, and tokenization, these firms are leveraging this technology to complement — and enhance — their existing service offerings.

Are you a commercial real estate investor or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United: an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more. 

Related Articles