“Commercial Real Estate: Predictions and Reflections 2023” – Practical Law Real Estate

“Commercial Real Estate: Predictions and Reflections 2023” – Practical Law Real Estate

Practical Law Real Estate asked leading real estate practitioners to share their thoughts on recent developments impacting the US commercial real estate market. Commercial real estate experienced another year of impressive growth in 2022, and despite cyclical headwinds, including increased interest rates, inflationary pressures, and a recession, the outlook for 2023 is cautiously optimistic. Although it is likely that the US economy will experience a recession in 2023, forecasts suggest that any recession will not be deep. The responses of Claramargaret Groover are featured below.

Q: Have increased interest rates and the threat of a recession affected deal flow?

A: To some extent, yes. However, many projects have been through the design phase and are ready for construction. These projects are proceeding with continuing efforts to control pricing by transparency in bidding subcontractors and pricing materials and equipment. Transparency is offered even on projects that are priced as lump sum, which is atypical. Smart owners and contractors are purchasing as early as possible to store materials ahead of additional market risks. Developers have already shifted to multi-family rental projects to diversify the portfolio with projects also underway in the condo market.

Q: How did product shortages and price issues affect construction projects that were
planned, pending, or in progress?

A: Product substitution and early purchasing of materials were some steps contractors took to work around pricing obstacles.

Q: Have clients scaled back or put voluntary construction or renovation projects on hold?

A: As experienced in the Great Recession, renovation projects and residential construction continue to be consistent. In this market, contractors still push for escalation provisions and owners include incentives, such as shared savings in cost-plus guaranteed maximum price (GMP) agreements. We are also seeing many more cost-plus arrangements without a cap.

Q: Is there a legal or business topic that you need (or want) to know more about based on the changes brought about in 2022?

A: The construction insurance market, as with other insurance markets in Florida, has hardened, so staying current with available and new insurance products continues to be important. Projects involving the energy sector introduce new design and construction risks to consider.

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