The US Economy is not yet in recession, but the commercial real estate (CRE) transaction economy is. We are seeing deal volume down by 50% compared to a very busy back half of 2021. A recent Deloitte survey of commercial real estate CFOs shows mixed outlooks for 2023, with about half expecting lower revenues than in 2022. Among our clients, who represent a broad spectrum of real estate stakeholders, we’re seeing a few common threads: tighter dealmaking practices, and a redirection of resources towards asset management.
On the acquisitions side, buyers are more cautious, and we have seen a stark uptick in deals dying in due diligence. Due diligence firms like ours can move quickly, but ironically, buyers are less likely to accept compressed due diligence schedules. Sellers are wise to create an environment for a fast close as a hedge against unanticipated market forces. One way that sellers can reasonably push buyers to move faster is by handing the buyer quality, predisposition, third-party due diligence reports prior to going under contract.
On the asset management side, now is the time to aggressively manage your portfolio. Portfolio managers are shifting to proactive/predictive capital planning and maintenance models to reduce spending and avoid unplanned capex events. Roofs are an area where proactive spending reduces overall spending considerably. Roof, pavement, mechanical are the big three budget categories for many property owners, so establishing a proactive management program can pay off in terms of substantial savings and extended system life.
The key to proactive management is complete, accurate data for all sites, building systems and components. Gathering quality data can be tricky; learn more about developing a quality data collection and management program here.
Seeking to optimize property value, portfolio managers are implementing electric vehicle (EV) charging stations, especially at retail and multifamily sites. The process of designing and installing EV charging stations is complex, often requiring an energy feasibility study; civil, geotechnical, and/or structural engineering; and an understanding of available technology and monetization platforms. Despite the challenges, meeting the growing demand for EV charging can increase consumer traffic, attract quality tenants, and even generate revenue.
Rooftop solar and carport solar can also generate revenue. Plus, the Inflation Reduction Act contains multiple incentives for renewable energy. Because many CRE owners are eager to take advantage of this combination, our solar group is now the fastest-growing group in the company. Prologis’s 2023 forecast predicts that installed warehouse rooftop capacity will double next year, fueled by reduced costs for sustainable building, government incentives and the European energy crisis.
Given the cyclical nature of our business, it’s not surprising that so many CRE players are treating the slowdown as an opportunity to focus on adding value to their portfolios—they’ll be better positioned when the market picks up again. We’d like to believe predictions that this slowdown will be short-lived and we’ll be seeing these efforts pay off soon.