The third quarter of 2022 is feeling sluggish for many of us in the commercial real estate industry. Rising interest rates and inflation have slowed the breakneck pace of the post-COVID recovery. Despite the threat of recession, we are confident that the abundance of capital awaiting deployment into real estate will bolster the CRE market through a slowdown, and as more folks return to office environments, traditional shopping, and entertainment venues, occupancy rates and rental income will stabilize.
While no one likes a downturn, after the frenzy of the last market, it's almost a relief to have a moment to re-evaluate. A slower pace affords us time to reprioritize and devote resources to initiatives that may have been back-burnered over the past couple of years. As usual, when transaction volumes cool and margins tighten, many CRE firms shift their focus to asset management strategies that reduce expenses, improve marketability, reduce risk, or streamline operations. Here are some of the trends our clients are focused on during this period:
ESG Programs Ramping Up: In addition to pressure from investors and consumers, SEC's proposed rule has added urgency to the movement towards understanding and mitigating climate-related risk in our portfolios. More buyers are looking to evaluate resiliency during the due diligence process, seeking timely data for better pro forma and strategy. Recent actions by the Biden administration will make solar projects more feasible and/or affordable, which is welcome news for many of our institutional clients who have committed to reducing greenhouse gas emissions and pursuing carbon neutrality.
The Charge for EV Readiness: The demand for Electric Vehicle (EV) charging stations was already growing as EV sales increased; now skyrocketing gas prices are expected to kick that growth into overdrive. State and municipal building codes are beginning to require EV-ready parking spaces, further driving demand. Our clients, especially owners of multifamily properties, require support not only for the engineering/construction of charging stations but for the implementation of the technology systems associated with EV charging.
Construction with Caution: Labor constraints and ongoing material shortages continue to challenge the construction industry, but construction lending is outperforming other real estate lending. Construction projects are moving forward, and increased risk management is required as contractors are pushing more risk towards developers and owners. ESG is also a key focus for the construction sector; our clients are now requesting reviews to evaluate plans through a resiliency and/or efficiency lens.
Data & Dashboarding: Live data is replacing static reports, both in acquisition due diligence and asset management services. Particularly for institutional players who handle portfolios, dashboard delivery of data is preferred for actionability and ease of integration into existing systems. Our clients are also beginning to recognize the value of quality data collection. Performance projections, capital plans, maintenance schedules, and ESG programs are only effective when built on complete, accurate data, which requires time and specialized skills to collect. Investing in quality data collection pays dividends in better decision making, proactive management, and clearer reporting.
As our clients shift emphasis to asset management efforts, we as a service provider devote more resources to practices that are more asset-management-centric, such as our roof management services. Let's hope inflation gets tamed and CRE will find a new normal in the back half of the year.
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Joe Derhake, PE
Joe Derhake, PE, serves as CEO of Partner Engineering and Science, a global environmental, engineering, and energy consulting firm. A registered Professional Engineer for over 25 years, Mr. Derhake has touched thousands of commercial real estate projects, from development and transactional due diligence to site remediation, asset optimization, ESG initiatives and more. His clientele includes many of the world’s largest lenders, real estate investors, and corporations. Mr. Derhake is a registered civil engineer in multiple states. He holds a bachelors degree in civil engineering from Michigan State University and Masters in Business Administration from University of Southern California.
