2023 Commercial Real Estate Outlook

Following a pandemic-fueled course correction, the global real estate industry faces transformational shifts in how buildings will be used, valued, and transacted in 2023 and beyond. Ongoing uncertainty in the global economy could impact the industry even more. In the near term, the potential for regional or global recession or stagnation looms—and these impacts would be felt across financial services sectors.

Deloitte surveyed 450 chief financial officers of major commercial real estate owners and investors to get their opinions about organizational growth and their plans for workforce, regulatory compliance, and technology. We also asked about their investment priorities and anticipated structural changes in 2023.

Our research uncovers priorities that commercial real estate (CRE) leaders can focus on to help their firms traverse this period of uncertainty and emerge stronger. Real estate firms should make informed, innovative plans to meet the evolving needs of investors, tenants, and regulators. Strategic portfolio execution, prioritizing environmental, social, and governance (ESG) to meet regulatory and stakeholder demands, understanding recent and pending changes to tax structures, rethinking talent approaches, and using technology to innovate and improve efficiency stood out as top priorities when planning for a year that, at the moment, is difficult to predict.
 

Here are the key findings from Deloitte’s 2023 Commercial Real Estate Outlook:

Concerns about the economy are top of mind for most global real estate leaders as they prepare for the remainder of 2022 and 2023. Revenue expectations for 2023 are mixed among those surveyed—40% say revenues should increase, 48% see revenues decreasing, and 12% expect no change. Last year’s results were much more optimistic: 80% expected revenues to increase in 2022. As a result, more respondents (33%) are planning to cut costs compared to last year, when only 6% planned to make cuts.

Respondents point to sustained high inflation, workforce management, cyber risk, and climate-regulated regulatory action as issues that will have the most impact on revenues over the next 12 to 18 months. Unfortunately, most respondents do not think the industry is fully prepared to respond to some uncertainties. As figure 1 shows, top concerns varied significantly by geography.

When it comes to real estate fundamentals—cost of capital, capital availability, property prices, vacancy levels, leasing activity, transaction activity, and rental rates—most respondents (66%) expect improving or stable conditions for next year. Respondents point to leasing activity, tightening vacancies, and rental growth as having the strongest potential for improvement.

Overall, downtown offices and suburban offices are seen as the most attractive risk-adjusted opportunities among property types over the next 12 to 18 months. There was significant variation among regions, though: European respondents identify suburban offices as their top growth opportunity (35%), Asia-Pacific respondents highly favor digital economy properties (43%), and North American respondents choose logistics and warehousing spaces (43%) as their top bet.

Uneven trajectories could force the industry in new directions over the next few years. Amid high uncertainty, many CRE owners and investors will need to focus on strategic, asset-level decision-making.

Our survey shows that real estate firms are still in the early stages of managing their ESG compliance requirements. Only 12% of respondents say they’re prepared to immediately implement changes to meet new regulatory requirements, and only 7% use ESG data and analytics in their investment strategy decision-making (figure 2). Most plan to start incorporating ESG data over the next year to two years.

Real estate companies will need to learn about potential regulatory changes and adopt practices to comply with reporting requirements. Since more than 45% of survey respondents say they are awaiting guidance or an industry-driven response, industry associations can play a critical role by providing observations, information, and recommendations. CRE leaders should also be sure to focus on more than just the “E” in ESG—social and governance issues are also important.

Respondents were also closely following trends in tax regulation. With tax policies around the globe in flux, top concerns for the industry were increased tax rates, changes to transfer pricing/profit-sharing, and the automation of enforcements. CRE leaders can help prepare their organizations for upcoming tax changes by:

1. Increasing transparency into reporting and data requirements for automated regulatory enforcement in certain jurisdictions; and
2. Factoring in the tax implications of ESG initiatives. For qualifying activities, existing or soon-to-be enacted legislation could provide real estate organizations with tax benefits, such as tax credits.

Many geographies continue to face competitive talent markets. Employees are capitalizing on low unemployment rates, a rising wages environment, and more remote-working options. The pandemic also spurred population shifts—many people relocated when work-from-home arrangements became the norm. CRE companies should see the desire to work remotely as a long-term talent trend.

Understanding employee expectations will help CRE leaders recruit and retain talented people. More than 40% of respondents plan to bolster diversity, equity, and inclusion (DE&I) initiatives, add additional health and wellness benefits, and offer regular remote-working options. But only about a third (or fewer) say their firms are prioritizing measures such as workplace redesigns, implementing flexible schedules, and offering more career growth and skill development opportunities. All of these areas could help CRE firms enhance the talent experience.

Compared to our 2022 outlook results, more respondents plan to cut or cap technology spending as firms curb expenses with tempered revenue expectations. Many anticipate some level of technology cost-cutting at their companies, and fewer than half expect to see any increase at all, especially in Europe (figure 3). This is in marked contrast to last year’s survey results, where only 7% anticipated spending cuts and two-thirds expected their companies to increase spending going forward.

Failing to invest enough in technology could be short-sighted. Real estate firms with the flexibility and risk appetite within the current environment can get ahead by exploring how technology can unlock potential in the long term.

Real estate firms should consider the benefits external service providers and proptechs can provide to existing operations. Leveraging a third party to cover back-office functions could allow CRE firms to spend more time enhancing core services. Innovative technology partners can also differentiate frontline offerings from competitors. Emerging technologies, such as smart contracts, tokenization, and the metaverse—currently being explored by 80% of respondent firms—could be leveraged to further complement and enhance existing services.

This year’s CRE outlook will explore the path forward and offer actionable insights leaders should consider as they plan ahead.