Planning ahead for a volatile 2023

With economic and geopolitical uncertainty looming large, our annual survey found that real estate finance executives are bracing for a rocky 2023. We explore how to prepare for the year ahead and how to best position your organization for future growth amid the volatility.

2022 was a challenging year on many levels. Continuing uncertainty and high inflation helped to fuel volatility across global markets. In response, the U.S. Federal Reserve aggressively hiked interest rates to address elevated inflation. In fact, the pace of their rate hikes is the fastest we’ve seen in decades. These factors have contributed to seismic shifts in a real estate sector that had already endured sweeping changes from the global pandemic.

It was against this backdrop that we embarked on our annual survey designed to take the pulse of our clients across the real estate industry. We wanted to hear directly from them about how they navigated 2022’s choppy waters and how they’re preparing for the year ahead. From their responses, three key themes emerged:

Below, we take a closer look at the survey responses, dig deeper on these key themes (and the potential opportunities they may create) and offer next steps on how to best prepare to survive (and even thrive) in what looks to be another turbulent year ahead.

About our survey

Findings from BPM’s Real Estate Market Conditions Survey are based on survey responses from real estate finance executives from across the U.S. Answers were provided throughout September and October of 2022.

The respondents represented a diverse cross-section of real estate subsectors, including:

Other: 25% (Including Construction, Residential, Lodging, Manufacturing and respondents with a mixed real estate portfolio)

Key finding: Rising interest rates are a significant concern.

As of November 2022, the U.S. Fed remains steadfast in its commitment to lower inflation. With that, the consensus fully anticipates interest rates to continue climbing until inflation begins to meaningfully decline.

At a practical level for real estate executives, higher interest rates are causing borrowing costs to spike — limiting the ability to finance deals. This is driving decisions to hold portfolio assets for longer and we anticipate that that trend is not going to slow down anytime soon.

Given that, it’s no surprise that the rising cost of debt surfaced as the top issue for our survey respondents — close to three-quarters of them (72%) said that debt is their top concern going into 2023.

72% of survey respondents said that debt was their biggest concern in 2023.

Further, nearly 62% of respondents think that market conditions will significantly impact their ability to raise capital in the year ahead and 75% said that rising interest rates are the top reason that raising capital will look different in 2023.

Despite those concerns—the vast majority of survey participants (88%) reported that they are not yet seeing lender concessions. This statistic likely represents the level of caution that banks have exercised in the wake of the Great Financial Crisis. Given that these responses reflect market views captured in September to October 2022, this is a theme that we will be closely tracking into 2023 as market uncertainty continues.

Implications:

1. Can you defer borrowing plans until interest rates decline?
2. What creative investment strategies can help you stay resilient while also remaining disciplined?
3. Can you continue to hold portfolio assets for longer?

75% of respondents said that the top reason that raising capital will change in the next 12 months is because of interest rate changes.

Key finding: Real estate organizations aren’t cutting back on technology spending, but they aren’t prioritizing it either—which could be a missed opportunity.

There’s no denying that innovation has completely transformed business across all sectors of the economy. From the integration of data, to the use of artificial intelligence and blockchain, to complete digital transformations — this evolution has happened through significant strategic planning and prioritization, with ongoing (and increasing) investments to match.

The reality is that although the real estate sector has made strides on the innovation front, it has generally been slow to adopt new technology. And it doesn’t look like 2023 will be the year that it makes up much ground, according to our survey respondents.

With overarching concerns about markets and the rising cost of capital, respondents are not cutting technology investments in the months ahead, but they aren’t planning significant investment either:

• Half of the respondents said they plan to increase their IT expenses in 2023
  • Of respondents that stated they were increasing their technology spending, the vast majority (66%) anticipated their investment would fall into the 0 – 10% range
• Half of the respondents expect their level of investment to stay the same

From these responses, we can infer that innovation will not be a priority for real estate organizations in the year ahead. But holding back on technology investment is a short-sighted approach, especially in the current market environment, where finding operational efficiencies is a top priority. Real estate organizations can get ahead by exploring how technology can unlock potential in the long-term, and help streamline operations to reduce time and budget spent on low-value tasks. For those willing and able to take the risk, the year ahead could be a pivotal moment to move their innovation agendas forward while others sit on the sidelines.

In terms of where survey respondents said they are prioritizing their technology budget in 2023, the strongest theme that jumped out was cybersecurity: 39% stated that cybersecurity was a high priority in 2023. This could be a direct result of the recent widespread industry adoption of the use of cloud technology, and the desire to prevent data breaches of the information within those systems.

39% of survey respondents stated that cybersecurity was a high priority in 2023.

Implications:

1. Is this potentially the right time to target technology investment to gain ground on the competition?
2. Could technology help improve efficiency in a lower-growth scenario?
3. How could an increase in technology spending now help fuel future growth in the short- and long-term?

Key finding: The workforce is forever changed.

The real estate sector at its core is a business rooted in physical properties and face-to-face interactions. But the organizations represented by our survey look very different today than they did at the start of the global pandemic. And it’s likely that they will never look the same again.

In fact, the majority of our survey respondents (52%) said that they plan to work on a hybrid model in the foreseeable future. Although a sizeable number, this is actually below average when compared to the market as a whole. According to Fortune, for example, 63% of high-growth companies have adopted a hybrid work model. Survey respondents provided a great deal of anecdotal detail about how their hybrid work models are performing. The spirit of these comments was overwhelmingly positive:

• “Our collaboration is better, and our junior staff is learning faster and learning more. Our culture is stronger as well.”
• “When you treat talented adults properly, the work gets done, and they do the right thing.”
• “Hybrid has helped keep employees at the company.”

But with some clear challenges mixed in:

• “You need face-to-face contact for easy flow of operating information.”
• “Decreased productivity, losing corporate culture.”

We’re also hearing feedback from our clients that current compensation will remain challenging in a high-inflation landscape. Indeed, current economic data paints a picture of an economy that’s losing some momentum, but still growing from a labor perspective. Recent Social Security increases are tied to the biggest Cost of Living Adjustment (COLA) in more than 40 years, resulting in an 8.7% COLA increase for most recipients. In this environment, many organizations are unclear about the level of compensation that will be required to retain key talent, and what they will be able to afford given volatile market conditions.

Implications:

• How can you better support your hybrid workforce?
• What technology do you need to implement to make your hybrid workforce more efficient?
• How can you better engage with your remote workforce?
• What is your long-term hybrid work strategy?

Conclusion

Market downturns are a part of doing business and our team has weathered similar conditions before. But we hear our survey respondents loud and clear – they are worried about high interest rates and volatile markets. They are holding the line on tech spending and also grappling with a changing workforce. Uncertainty is challenging and change is hard – but these conditions can also open the door to future opportunities.

We explore three next steps that real estate organizations can take to position themselves for potential success in this climate:

• Invest in tech. Innovation doesn’t stop, and most firms can’t afford to take their foot off the gas. If markets are scaring off your competition from technology investment, now might be the time to get a leg up on them.
• Explore new markets or defer borrowing. Interest rates are likely to go higher and stay elevated into the first half of 2023, so traditional borrowing routes may not make sense in the short-term. Can you explore new funding sources, such as the private markets? Can you achieve greater efficiencies to save costs in the meantime?
• Prioritize your people. Your people are your greatest investment, and they’ve been through a lot of change themselves. Prioritizing the engagement of your workforce (that is likely working remotely at least part of the time) remains a priority, but approaches should be reconsidered and can be accomplished with minimal cost.

Contact us today to start planning ahead for 2023.