2023 commercial real estate outlook

Deloitte survey: Global real estate companies cautious with 2023 plans amid economic uncertainty

• Only 40% expect revenues to increase in 2023, down from 80% in last year's survey
• Owners and investors target offices and digital economy properties
• Addressing trends in ESG and tax regulations while leveraging technology vital to boosting growth and operating efficiencies
  

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. Deloitte's 2023 Commercial Real Estate Outlook reveals that only 40% of global real estate chief financial officers (CFOs) expect to finish 2022 with higher revenues than last year, and 33% anticipate cuts to expenses, citing sustained high inflation, workforce management, and cyber as the top risks to financial performance.

Deloitte China Real Estate Industry Leader Philip Law says, "Uneven growth
trajectories could propel the industry in new directions over the next few years. Amid high uncertainty, commercial real estate companies should focus on strategic, asset-level decision-making to meet the evolving needs of investors, tenants, and regulators. Operating with a 'business-as-usual' approach should be long behind us."

"Strategic portfolio execution, prioritizing ESG to meet regulatory and stakeholder demands, understanding recent and pending changes to tax
structures, and using technology to innovate and improve efficiency stand out
as top priorities."
 

Dampened revenue prospects amid an uncertain outlook

Revenue expectations for 2023 are mixed among the 450 CFOs of major commercial real estate owners and investment companies surveyed, with 40% saying revenues should increase, 48% seeing revenues decreasing, and 12% expecting no change. Last year’s results were much more optimistic, with 80% expecting revenues to increase in 2022. As a result, more respondents (33%) plan to cut costs in 2023, down from a mere 6% the previous year.

Overall, respondents point to sustained high inflation, workforce management, cyber risk, and climate-related regulatory action as issues that will have the most impact on revenues over the next 12 to 18 months. Concerns about climate-related regulatory action are top of mind for Chinese Mainland real estate leaders, who gave their current level of preparedness an average score of 2.9 out of 5.
 

Offices and digital economy present attractive investment opportunities

When it comes to real estate fundamentals, such as cost of capital, capital availability, property prices, vacancy levels, leasing activity, transaction activity, and rental rates, most respondents (66%) expect improving or stable conditions next year.

Downtown offices and suburban offices are seen as the most attractive risk-adjusted opportunities over the next 12 to 18 months, with 43% of Asia Pacific respondents choosing digital economy properties as their top bet. 

Law adds, "The mass adoption of digital technologies, coupled with the continued surge in demand for cloud computing and storage, have driven record demand for data centers. However, disruptions in the availability of
semiconductors, a primary component in data center infrastructure, could impact operations and new development through 2022 and beyond."
 

Regulatory challenges: ESG disclosure requirements and new tax regulations

Deloitte's survey shows that real estate firms are still in the early stages of managing their ESG compliance requirements. Only 12% of respondents say they are prepared to immediately implement changes to meet new regulatory requirements, and just 7% use ESG data and analytics in their investment strategy decisions. Most plan to start incorporating ESG data over the next year or two years.

With tax policies around the globe in flux, the top concerns for the industry are increased tax rates, changes to transfer pricing and profit-sharing, and the automation of enforcement. Commercial real estate leaders can help prepare their organizations for upcoming tax changes by increasing transparency into reporting and data requirements for automated regulatory enforcement in certain jurisdictions, and by factoring in the tax implications of ESG initiatives.
 

Embracing technology for greater efficiency and new opportunities

Given overall economic concerns and ongoing supply chain uncertainties, many respondents predict some level of technology cost-cutting at their companies, with fewer than half expecting any increase in tech spend at all. This is in marked contrast to last year's survey results, in which only 7% anticipated spending cuts and two-thirds expected to increase spending. In Asia Pacific, 42% of respondents say their companies plan to increase tech budgets, and close to one-third expect cuts.

Deloitte China Real Estate Sector Financial Advisory Leader Carl Fang says,
"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."

"Globally, investment in proptech rebounded in 2021 and reached a new high of more than USD24 billion, following a sharp decline in 2020. Nearly half of respondents in Asia Pacific see the benefits of proptech, and regulatory proposals on climate disclosures have also stimulated interest in climate-related property technology."

Smart contracts are also gaining momentum, as more than half of respondents reported being in a pilot, early-stage implementation, or production. These efforts could be linked to early-stage exploration of the metaverse, where smart contracts are the foundation of all virtual real estate transactions.

Deloitte China Real Estate Sector Audit & Assurance Leader Alan Ni concludes, "The roadmap for future growth will likely vary significantly based on firm size, segment, and location. Understanding and responding to change is only part of the solution. Commercial real estate leaders should also explore and unlock additional value through strategic partnerships and enhanced data capabilities. Actions like these might seem like bold moves now, but they could give some firms an edge when so many others are consolidating or cutting back."
 

About the 2023 Commercial Real Estate Outlook

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

Respondents were equally distributed among North America (the US and Canada), Europe (the UK, France, Germany, and Switzerland), and Asia Pacific (Australia, the Chinese Mainland, Japan, and Singapore).

The survey included real estate companies with assets under management of at least USD100 million and was completed in June 2022.