Commercial real estate businesses face challenges in their regular course of business, regardless of the economic climate. Remember, while these challenges are significant, they also present opportunities. Many CRE companies are finding innovative ways to adapt and thrive as global events affect inflation, financial markets and the supply and demand of commercial properties.
And of course, the specifics of CRE challenges vary based on geographic region, the segment of commercial real estate (office, retail, industrial, etc.), and other factors.
1. Economic Uncertainty
Fluctuations in global and local economies can have direct implications for commercial real estate. Recessions, trade wars, and other economic downturns often result in reduced demand for commercial spaces. When interest rates are low, that lowers the cost to borrow money, which encourages more borrowing and, hence, expansion. In the last 20 years, two major events are excellent examples of “economic uncertainty”: The Great Recession (2007-08) and the global COVID pandemic (2020-21). USBank analyzed 90 years of presidential elections and market performance and found that, although many things affect the economy, some markets show “muted performance” in the year leading up to an election.
Opportunity: Economic downturns can lead to lower property prices, allowing companies with capital to acquire assets. These can be lucrative long-term investments when the market rebounds.
2. Impact of Remote Work
Speaking of the COVID-19 pandemic, that significantly accelerated the adoption of remote work, which saw a decrease in demand for commercial office space. Many companies realized that their employees could work from home effectively, leading some businesses to reconsider their need for office spaces, or to opt for more flexible, hybrid models.
Office vacancy rates in the US are at an all-time high, according to data reported by IBISWorld.1 In 2000, for example, CRE office rental vacancies were under 10%; since 2022, office vacancy rates have averaged 17.4%.
Opportunity: There's an increased demand for flexible workspaces4 and coworking spaces. CRE companies can repurpose or redesign traditional office spaces to accommodate these needs.
3. E-commerce and Retail
The rise of e-commerce has challenged traditional retail spaces. Many brick-and-mortar stores faced closures, leading to an increased number of vacant retail spaces in malls and shopping centers. Around the time of the Great Recession, 2007-08, retail square footage per capita in the U.S. was at an all-time high, around 150 SF per capita, but by 2023 it was under 100 and it is expected to continue trending downward in 2024.2
Opportunity: Vacant retail spaces can be repurposed into experience-driven establishments, warehouses, or fulfillment centers for e-commerce giants. Amazon has been leveling abandoned shopping malls and transforming the sites into distribution centers all over the country, for example.5
4. Sustainability and Environmental Concerns
There's increasing demand from tenants and investors for sustainable, energy-efficient buildings. CRE companies must adapt to these expectations, which may require significant investments. Read more about sustainability trends in commercial real estate.
Opportunity: Green building certifications and retrofitting older buildings for energy efficiency can attract eco-conscious tenants and potentially fetch premium rents. Read more about LEED building certification.
5. Technological Disruption
Proptech (property technology) has introduced innovative solutions in property management, leasing, and building operations. Companies that fail to adopt and integrate these new technologies risk becoming obsolete. What is proptech? Read more about proptech in CRE.
Opportunity: Embracing proptech can streamline operations, enhance tenant experiences, and improve property management, potentially increasing profitability. Take a deep dive into this topic with Biscred’s guide to proptech.
6. Changing Demographics and Urbanization
As younger generations, like millennials and Gen Z, display different living and working preferences, CRE companies must adjust their offerings. This includes more mixed-use developments and amenities-driven properties. Read more about how outdated buildings in Chicago suburbs are being converted into mixed use buildings.
Opportunity: Work with local economic development authorities and transform older buildings into mixed-use developments that combine residential, commercial, and entertainment spaces, making urban living more attractive to young people.
7. Regulatory and Zoning Challenges
In many areas, strict zoning laws and regulations can hinder development or repurposing of commercial properties. Additionally, the lengthy process of rezoning, public comment and review when a property is rezoned, especially for commercial purposes, can frustrate commercial property development.
Opportunity: By working collaboratively with local governments, CRE companies can help shape favorable policies or gain incentives for development. This is a time when a good PR or marketing team or partnership can help build relationships between CRE companies and the people who live, work and pay property taxes in your area.
8. Capital and Financing
Access to capital can be challenging, especially during economic downturns. Additionally, interest rate fluctuations can affect the feasibility of projects and the cost of capital.
Opportunity: Diversifying financing sources, exploring partnerships, and tapping into new investment vehicles (e.g., REITs) can provide robust financial grounding.
9. Supply Chain Disruptions
Companies learned a lot about supply chains in 2020-21. It’s not a topic that is reserved for only scholars and operations managers in manufacturing. Indeed, even service organizations have supply chains and are affected by disruptions up chain and down chain. Events like the COVID-19 pandemic and geopolitical tensions have shown the vulnerabilities in global supply chains, affecting the timely completion of developments and renovations.
Opportunity: CRE companies can invest in local sourcing or support the development of local manufacturing hubs, reducing dependency on global supply chains.
10. Over Supply in Some Markets
When supply outpaces demand in any economy, prices tend to fall. That’s great for consumers, but not so much for investors, property managers, and owner/operators. In certain areas, there might be an oversupply of specific types of commercial spaces, leading to decreased rents and increased vacancies. In large urban areas like Chicago, “zombie buildings” are sitting vacant and lowering property values.
11. Globalization
The interconnectedness of the global economy means events in one part of the world can have ripple effects on commercial real estate markets elsewhere. Examples include Russia’s invasion of Ukraine, which some economists attribute to supply chain delays, increased fuel prices and decreases in global stock markets.3
Opportunity: Companies can expand their portfolios by investing in emerging markets or areas less affected by global downturns, diversifying risk.
12. Cybersecurity
With the increased adoption of digital tools and platforms, CRE companies face the challenge of protecting their data and systems from cyberattacks, as well as demand from tenants and occupants for secure Wi-Fi networks.
Opportunity: Investing in top-tier cybersecurity measures can become a selling point for tenants concerned about their data, making a property more attractive.
13. Adapting to Changing Workforce Needs
Modern workers demand different amenities, from wellness rooms to more collaborative workspaces. Keeping up with these demands requires constant adaptation and investment.
Opportunity: Modern amenities, from green spaces to tech-equipped conference rooms, can attract premium tenants and higher rents.
Why We Wrote This
For CRE companies, the key is adaptability and foresight. Recognizing where the industry is headed and proactively addressing challenges can position a company not only to survive but to thrive in a rapidly changing landscape. The Biscred team has been in the commercial real estate space for a long time. These top challenges in the CRE industry are the reason we launched our web-based application in 2022. If you’re ready to grow your business and do business development prospecting the smart way, schedule a demo today.
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