Commercial Real Estate: Are the warning lights flashing?

The global financial crisis. The rise of e-commerce. Brexit. Covid. Inflation. The commercial real estate market could use a few years of stability, but we’ve become used to upheaval, black swan events and the breathtaking pace of change levied on offices, retail and industrial property by a sweeping technological revolution that has transformed the way we work, shop and live. 

The first quarter of 2023 saw a continuation of hesitancy in dealmaking in the UK. Meanwhile, a creeping sense of anxiety about the medium to long term future of commercial real estate globally has dominated the headlines due to strong interest rates and an increase in hybrid working. We try to make sense of it all and seek the positives for the proptech sector.

High interest rates, low interest in returning to the office

Although we are beginning to see signs of inflation easing, the persistent nature of high inflation and the necessary intervention of the Bank of England in gradually raising interest rates, has left commercial real estate in a bit of a quandary. Although there has been a partial return to the office for some, Covid has radically altered the way in which workers operate and the expectations of employees has fundamentally changed since the start of 2020.

A recent Financial Times article noted that “US banks [are] on alert over falling commercial real estate valuations” (https://www.ft.com/content/705df695-c81c-4ddf-8d56-a0a6e9cd7500). It’s not just banks that are worried. There is an obvious risk to real estate over the short to medium term, with high interest rates increasing the cost of debt for landlords and developers alike.

But there is a long term existential question increasingly being posed to the commercial real estate sector; as the retail sector has already shown and suffered from, if the purpose of the piece of real estate is diminished - people have proven they can effectively work and shop from home - then why exist at all? And what happens to the billions of square feet of commercial real estate stock that does exist globally?

Deals or no deals?

Given the wider economic turmoil, it’s no surprise that European commercial real estate dealmaking hit an 11-year low in the first quarter of 2023, according to MSCI (https://www.ft.com/content/16bf0b7a-8628-436a-a549-9abed859609e). This is a 62% decline from Q1 2022, and underlines the significant headwinds influencing commercial real estate.

Dig a little further though, and the questions that do arise are whether this is because fundamentals such as high inflation and hybrid working, or whether it is because the fear of high inflation and hybrid working is causing the cogs of global deal making to seize up. Confidence and sentiment remain huge factors across the real estate industry, which is still largely traditional in its approach. A number of companies Bloxspring works with are however challenging the traditions of real estate by providing data, management and analysis that allows the most forward thinking dealmakers to make more informed decisions over when is the best time to buy (or indeed, not to buy). 

One of the key selling points of the proptech industry is that it is not just for the good times; proptech can provide significant value, especially during the challenging periods. This is the time to seize the golden opportunities that are hard to come by when the market, as a whole, is flourishing.

EPC comes into play

The beginning of Q2 saw new EPC regulations come into force across real estate in the UK. As part of the government’s drive to achieve net zero by 2050, the regulations ensure only commercial real estate with an EPC rating of ‘E’ or better can be available for new leases or renewals. In April 2027 this will move to a ‘C’ rating, and a ‘B’ rating by April 2030.

Amidst market uncertainty this is a positive step in the UK, with estimates suggesting that, globally, the energy used to power real estate accounts for 28 percent of all carbon emissions (World Green Building Council). With the automotive, aviation and fossil fuel industry bearing the brunt of public displeasure over climate change, real estate has got off lightly so far. It is positive to see that despite this, the industry is moving forward with plans to decarbonise, albeit at a pedestrian pace.

At Bloxspring, we are proud to work with several companies providing services to help the real estate industry lower their climate footprint, whether that be through software, data or physical improvements to buildings.

What next for 2023?

Admittedly, this isn’t an update surging with optimism for the year ahead, but a reflection of the uncertainty and reality facing commercial real estate in the UK. Nonetheless, it does highlight the importance of finding solutions to issues facing the industry, with proptech a significant part of that. 

At Bloxspring we can help the innovative companies changing the real estate industry find a voice, get in touch with us to find out more.