Challenges and Opportunity of U.S. Real Estate Conference during MIPIM 2023.
The Visionary Brain Behind Public-Private Initiatives in NYC
Challenges and Opportunity of US Real Estate opens with NYCEDC’s COO Melissa Román Burch, who oversees Asset Management and Real Estate Transaction Services. She administers NYCEDC’s portfolio, which includes 200+ unique and iconic assets spanning 64 million square feet of commercial and industrial real estate, essential infrastructure, and energy assets. She is in charge of public-private initiatives on City-owned property. Melissa begins the discussion by sharing the current trends in New York real estate development and investment, drawing on her extensive experience and knowledge of the industry to discuss topics such as the economic strength of New York, the increasing importance of technological innovation, the need for more affordable and equitable housing, and the importance of sustainable and resilient design. Melissa also discusses the value of collaboration and partnership in creating more sustainable and inclusive communities and the role that real estate developers and investors can play in supporting social and environmental sustainability. Although New York is its market, much of what the city is facing is relevant to the rest of the world.
Investing in ESG in a Shifting Landscape
Melissa is followed by a panel of highly accomplished real estate specialists. Fifth Wall partner Jeremy Fox, Partner at PwC: Katherine Huh, Shawn Lee: Americas Nuveen’s chief investment officer and head of funds management Samia Rowan. They discuss the opportunities and challenges facing the American real estate market. Rising interest rates, greater interest in ESG, and geographic changes are some of the major issues addressed.
Rising Interest Rates: New Norm or Temporary Spike?
According to Shawn Lee, back at the beginning of 2022, it was a favorable tale for practically all asset classes. Interest rates were low, and it was easier to borrow money, both of which led to increased demand for real estate. As the interest rates continue to climb, we see the cost of borrowing money simultaneously grow, resulting in a demand decrease for real estate and a reduction in the number of transactions. The decline in the total amount of real estate transactions is having a significant impact on the stock market, which is being affected in various ways.
To begin, it has had the effect of decreasing the overall liquidity of the market since there are now fewer transactions taking place than before. As a result, it is more difficult for investors to purchase and sell real estate assets since fewer buyers or sellers may compete for the available inventory on the market, making it more difficult for investors to buy and sell real estate assets. According to Lee, “I think everybody’s going to kind of be out of the market right now, and so the availability of debt is going to be much less going forward, which isn’t going to be great for our industry.” With fewer transactions value of the asset is damaged and might make it more challenging to secure financing because of the risk of investing. On the other hand, Lee gives some relief when he states we should start seeing the horizon plateauing as rates decline and transactions ramp up.
ESG: A Sustainable Future for Investors and the planet
The panel conversation moved to ESG. The concept that ESG is gradually becoming a key focus of business strategy for most commercial real estate companies was a recurring theme in this session’s panel discussion. This shift is being pushed by the goal of minimizing costs, fighting C02 emissions, and conserving energy.
Cost optimization is also a driving element in this transformation; research suggests that enhanced building effectiveness and the rising popularity of green leasing will boost firms’ bottom lines, adding value to real estate assets. Tenants want environments that improve their well-being and offer feedback on enhanced happiness and productivity in sustainable spaces. In addition, international institutional investors demonstrate a desire for high-quality office products driven by a health and wellness environmental purpose. There has been an uptick in vacancies around Manhattan, but mainly in “trophy” and “class A+” structures. As a result, the City Council, the Mayor’s Office, and the State are working together to draft legislation allowing commercial buildings to be repurposed for residential use. Almost a quarter of the commercial market might be converted, giving office building owners more options. Most individuals who participated in the panel agreed that becoming a sustainable building is critical for long-term value creation. Specifically, Katherine Huh states, “she believes the future of real estate is smart buildings, and we use too much energy in our buildings, greenhouse gas emissions are too high, we are wasting too much water, wasting too much everything.”
Asset investors now require several risk mitigation measures, including ESG legislation and reporting requirements. The Paris Agreement is a worldwide effort to combat climate change via international collaboration and collective action. Its laws and agreements enhance ambition, openness, and accountability while encouraging sustainable development and safeguarding vulnerable people. ESG plans are increasingly being recognized as a vital component of corporate strategy and are developed within the framework of enterprises. One of the most significant things a firm can do is outline its operations and investment processes and give a clear plan for current and future activities.
How Climate Change and Natural Disasters are Affecting CRE
The “E” (Environmental) of the ESG discussion lead to a climate change discussion. As a result of increasingly frequent and severe weather events, rising sea levels, more significant property damage, economic losses, and uncertainty and risk, insurance premiums are growing as a direct consequence of global warming. These variables are causing property owners to pay higher insurance rates, presenting difficulties for insurance companies in effectively evaluating and managing risk. Insurance premiums may be lowered by ESG practices’ risk avoidance, resilience building, reputation boosting, compliance with regulations, and promotion of openness. Insurance premiums and operational expenses for businesses that adopt ESG practices are cheaper. Insurance rates for Florida’s commercial real estate were reviewed in detail since they are higher than in other states due to the state’s vulnerability to rising sea levels, which might reduce the building’s resale value, increase operating expenses, or limit its access to financing. To mitigate the potential damage to their investments and property, business owners and landlords must be aware of these threats and implement ESG principles. This may involve elevating structures, putting in place flood-proofing measures, and reevaluating the development patterns in regions that are susceptible to flooding.
The Future of the US market
In conclusion, the combination of environmental, social, and governance (ESG) issues, increasing interest rates, and geopolitical worries offer the commercial real estate market possibilities and challenges. As the importance of environmental, social, and governance (ESG) factors continues to grow, investors are forced to adjust their practices to account for them when making investment choices and running their businesses. At the same time, increasing interest rates and worries over geopolitics may cause uncertainty and risk in the market, which requires careful research and preparation for unpredictable events such as the recent collapse of Silicon Valley Bank (SVB).
Article written by Angelina Lugo and Jessie Kelley who have master’s degree in real estate from the University of San Diego.