My Top Five Christmas Wishes for the Commercial Real Estate Industry in 2023

HO-HO-HO, it is starting to look a lot like Christmas here in Wisconsin and the holiday spirit is all around us. If you've tuned in before, thank you and welcome back to the Riopel Real Estate Round-up! This is a very special holiday edition where I hope to to discuss some market dynamics occurring right now and share a few of my hopes and dreams for the commercial real estate industry at large in the year ahead. Thank you again for continuing to tune in and if you've missed any of my previous editions, please find them?here.

So let's dive in. Today, I wanted to take some time to share my top five Christmas wishes for the commercial real estate industry in 2023.

Between the Fed's battle with inflation, the dramatic changes to the dynamics of the way we work and wild fluctuations in the stock market, 2022 has been one heck of a ride for commercial real estate professionals. Here are my Top Five Christmas Wishes for the Commercial Real Estate Industry:

Clarity in the Capital Markets

There's no way around it, since about the middle of 2022 there has been extreme volatility and uncertainty in the capital markets. Which has put the brakes on a lot of CRE transactions. Lender's are sharpening the pencils and requiring lower leverage and higher equity investment. For investors, that likely means lower returns unless Cap Rates adjust dramatically and typically the market lags on that front. Of course, this reality has been driven hard by the Fed's battle against inflation and the back to back to back to back rate hikes at the fastest pace we've ever seen. While rising costs (inflation) combined with rising cost of capital (rate hikes) is inherently difficult for commercial real estate investors to navigate, part of the problem is the uncertainty surrounding how hard the Fed will push rates and for how long. Case in point, yesterday the Fed raised the Fed Funds rate 50 basis points which was 25 basis points less than their previous hikes. This signaled that the Fed is acknowledging progress in its fight against inflation, but guidance also suggested that the Fed intends to keep rates higher for longer. My first wish for 2023 is for the Fed to provide additional clarity on timing which in turn will stabilize the capital markets.

Declines in Inflation

If it hasn't already been burned into our collective minds enough already, inflation is typically a bad thing. It causes the cost of our everyday lives to increase on an absolute basis. After remaining relatively flat for most of the last decade, we've seen in the last year some of the highest gains in inflation in over thirty years. From the eyes of a real estate developer, inflation typically means higher costs of materials and wages which in turn means the developer need to charge higher rent and so on and so forth. We've seen some evidence of material costs retreating but wages and labor remain stubbornly high in construction. We will may benefit if the Fed is successful in its battle against inflation. My second wish is for inflation to continue to decline and sooner rather than later.

More Opportunity for all

Commercial real estate has long been considered an industry that is lacking in diversity, but there are many incredible efforts underway to address this. This summer, I was fortunate to help organize the Marquette University Vieth Institute for Real Estate Leadership & NAIOP Wisconsin MKE CRE program, a weeklong commercial real estate immersion program held on campus at Marquette University for high schoolers from underrepresented populations. With a impending enrollment cliff due to affect university programs, the need to identify, train and eliminate hurdles for opportunity for all and to direct the best talent to commercial real estate the has never been greater. Programs like these are just the start and my wish is these efforts continue to grow and achieve their goal of greater opportunity for all!

Rational Thinking in the Remote Work/Return to Office Debate

Certainly, one of the greatest debates of 2022 has been the confrontation between the "return to office", whatever "hybrid work" means and the realities of 100% "remote work". Let's face it, technology has allowed many of us to work from anywhere for a very long time, but there has been an inherent value in collaborating face-to-face in an office environment. The pandemic shone a light on how effective flexible work arrangements can be, but also created some consternation and isolation for certain fractions of the workforce. The commercial real estate industry is trying to find a solution. Some have suggested that declines in office are more the result of decades of neglect and the failure to adjust some lesser tier product to changing realities than some revelation in productivity that occurred during the pandemic. To be honest, I don't know the answer and frankly don't expect 2023 to suddenly solve this question either, as it is far more likely that office development is continuing to evolve much like e-commerce has forced retail to evolve. The reality is that no one is answer is likely correct. From my vantage point, I think many are focusing on the wrong metrics. Who cares how many "key swipes" the office building is getting, more important to me is how effective that time spent in the office can be. How I see office as a value is measuring how effective that space is in making it easier to do my job and measuring how the space provides easy access to resources that I don't have somewhere else (amenities, co-workers, technology etc.). In my opinion, we need to stop focusing purely on utilization and be more intentional, my wish is that we take a more rationale approach to the office debate in 2023 and zero in on the value proposition of the office asset class.

Prosperity for All

My last wish is very simple, with questions around the economy looming and the dreaded "R" word being thrown around, my wish is that all my friends, colleagues and professionals in the commercial real estate industry have a prosperous and successful 2023! This is an incredible industry because of all of you and I'm hopeful we can continue to innovate and provide the best real estate solutions for our clients! So Merry Christmas and Happy Holidays to all of you and all the best in 2023!