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

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

Practical Law Real Estate asked leading real estate practitioners to share their thoughts on recent trends and developments impacting the commercial real estate market, including the COVID-19 pandemic, and provide predictions for the rest of the year ahead. The responses of Claramargaret Groover are featured below.

Q: What developments in the real estate and construction markets surprised you the most in 2021? What will the real estate market look like in 2022?

A: The biggest surprise was how hot the market was in certain areas of the country, such as Florida, and that it stayed hot through the COVID-19 pandemic despite inflationary and supply chain pressures on developers, contractors, and subcontractors. Construction trade industry economists, including the chief economist of the Associated Builders and Contractors, estimated that inflationary pressures may lessen in the second half of 2022, but this estimate predates the invasion of Ukraine. Owners and developers will be glad that cost escalation provisions and guaranteed maximum price (GMP) contracts allow flexibility to reduce construction costs, because inflation and supply chain cost increases will be less justified going forward.

Q: What are the main factors that contributed to the substantial increase in deal flow win 2021? Is this trend likely to continue in 2022?

A: The availability of funds was an important factor that contributed to deal flow. US consumers reportedly accumulated $2 trillion in excess savings in 2021. Fewer bankruptcies occurred in 2021 because capital was available to purchase distressed properties, and owners were able to avoid fire sales. An increasing number of developers and contractors anticipate rising profit margins, even taking the tight labor market, inflation, and supply chain issues into account. Therefore, I expect the trend of increased deal flow to continue.

Q: Given that an increasing number of companies are implementing their return-to-office plans, has there been an uptick in office leasing? Is office space being converted into other asset classes, such as hotels, residential units, or affordable housing? Does any conversion trend extend to other asset classes, such as retail-to-life science conversions?

A: The trend in leasing office space appears to be the reconfiguring of existing tenancies to allow employees to utilize office space on a staggered, visitor basis. This trend is moving slowly, perhaps in light of some forecasts that employees’ work quality and productivity will be enhanced by the ability to collaborate in the office.

Q: In what ways might the Build Back Better legislation or new climate legislation affect the real estate market and change how market participants do business? Is there any other proposed legislation that market participants should monitor?

A: The infrastructure legislation is already having an impact on the bidding of public construction projects and increasing construction jobs in anticipation of funding. Projects that are planned or already underway qualify, as well as new ones not planned yet. Governors have the ability to direct funds to projects without legislative action. Federal funds will also be available through competitive grants requiring state and local matches. Companies involved in public construction contracting, as well as private companies that are being granted tax incentives for development in the manufacturing sector, are already planning and designing real estate improvements.

Q: What are the short-term and long-term effects of supply chain issues and labor shortages on construction and development?

A: Pricing and contracting to anticipate supply chain issues and inflationary pressures continue to burden contractors and owner-developers. Cost-plus contracts with and without a GMP continue to be an effective tool to get projects started. Construction labor shortages are an ongoing problem in the industry, which struggles to replace retiring baby boomers who exited the workforce in the aftermath of the 2008 financial crisis or less experienced younger workers who may have dropped out as part of the COVID-19 re-evaluation of their career paths.

Q: In your specific areas of expertise, what will be the hot topics for 2022? What do you anticipate will be the biggest disrupters in the real estate and construction markets in 2022?

A: Inflationary pressure is expected to be the wildcard, and a shortage of experienced and trained design and construction professionals and workers will continue to burden developers and contractors in design and construction projects.

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