Sept. 28, 2022
Predictions of work-from-home becoming the new norm are being disproved by employees’ gradual return to the workplace.
Despite the headlines, the death of the office is by no means imminent. The bygone Covid-19 pandemic – as well as the current inflationary climate – has posed unique opportunities for the real estate industry. And, as always, there are winners and losers across the sector.
Commercial real estate underwent a dramatic change since the pandemic’s outbreak. Remote working throttled the demand for office space. Meanwhile, the industrial market saw a boom following a rise in e-commerce, and the hospitality industry experienced pandemonium as hotels cut capital expenditures and scaled down operations.
Amid these disruptions, commercial real estate developers and investors have been resilient. They accelerated the adoption of new technology, created more holistic risk management strategies and embraced the changing nature of office space. The rise of e-commerce has been a big part of that, creating new structural demand for logistics.
And digital working practices will continue to change the workplace as real estate companies build offices to be smarter, safer and more efficient than before. Not to mention spacious. Before Covid-19, offices were one square foot per employee; that has now changed as companies seek more space so employees can spread out at desks and have more room for amenities.
IPSX CEO Roger Clarke said: ‘Macroeconomic headwinds continue to erode the growth prospects of various sectors, while global instability looks likely to persist and inflation-induced recessionary fears are fast becoming a reality. This is driving capital allocations away from speculative equities towards the few perceived safe-haven assets, with commercial real estate standing out as attractive in this context.'
While the current market situation is anything but certain, the conditions for real estate appear favorable. ‘It has become increasingly difficult to source income from a steadily reducing pool of options. Commercial real estate is uncorrelated to other asset classes and has proven its defensive nature throughout cycles, delivering the rare combination of attractive returns and capital appreciation which supports wealth preservation and acts as a hedge against a highly inflationary environment.’
Most people are trying to return to work for a variety of reasons, including home and family size, social connectivity and broadband speeds. Working spaces have become a trustworthy option for employees and companies since they allow flexibility. On top of that, they will determine the future of the office in the years to come.
Inflation and real estate
Commercial real estate investment can serve as a robust inflation hedge, providing benefits such as cash flow, capital gains, portfolio diversification and favourable tax treatment. Even as inflation rates skyrocket to their highest point yet, the effect on commercial real estate remains indirect.
One thing that does impact the sector is the rise in costs of construction materials, energy and commodities. But even at that, the advantages outweigh the setbacks from the perspective of a real estate investor. If the property development cost is high, there is no doubt that an investment in real estate can be a solid inflation hedge.
The protection against inflation is different for rented properties than for owner-occupied properties. The rising value of the property is offset here by the ongoing costs of managing and maintaining it – which also rise during inflation. A good retirement investment is an essential factor when it comes to financial security. And investing in real estate looks to be the best alternative in these times, offering sound protection for one’s assets.
Decarbonizing real estate
Commercial real estate plays a key role in global decarbonization efforts as buildings are responsible for about 40% of global greenhouse gas (GHG) emissions. Significant reductions in emissions can be achieved with positive economics through technologies that already exist. Newer technologies such as low-carbon heating and cooling systems, and energy-efficient air conditioning, are all good examples of cost-effective upgrades that can create meaningful change while also de-risking assets.
Investors’ commitment and increasing regulatory pressure will enforce significant change. This is seen as an opportunity to generate returns.
Working from home is here to stay, but from the trends we’re seeing in commercial real estate, companies are not abandoning their offices. On the contrary, they are expanding them.
On top of that, many are trying to reel their employees back by offering incentives that are reflected in the quality of office space. Although nothing is set in stone, it looks like the economy behind real estate is here to stay. However the new workplace will look, it will undoubtedly be a collaboration between landlords and tenants as businesses respond to changing employee expectations, economic pressures and a more volatile world.
Clarke said: ‘Investors would be better convinced by any means of gaining direct exposure to hand-picked commercial real estate assets which offer secure and visible income streams, with liquidity and underlying performance transparency being key considerations.’