As the two-year pandemic finally begins to fade into the background (at least for now), commercial real estate continues to adapt to market challenges, both old and new. Inflation is an old challenge that took quite an extended vacation, but it’s back with a vengeance (as discussed in my recent blog post). Oil prices in particular are exceedingly volatile, which can have a vast array of effects on consumer sentiment and distribution costs. Given oil’s importance throughout the economy, a sustained rise in oil prices could trigger another economic downturn nationwide or worldwide.
In addition to inflation, the industry is battling supply chain issues. Suppliers around the world ramped down production and distribution capabilities during the pandemic due to lower demand. Revitalizing those capabilities back to pre-pandemic levels takes time, particularly if new capital investments are needed in factory equipment and trucks, for example. Landlords, developers, and tenants all need continuous access to products to keep their economic engines humming. The present environment of stops and starts makes it harder to plan ahead and to have confidence in economic forecasting, which in turn makes it harder to build new projects and to achieve a steady income stream from operating properties.
Seismic shifts in the labor market also present challenges for commercial real estate. With demand exceeding supply, good workers find themselves more in the driver’s seat to demand better wages and different working conditions, or to vote with their feet and find a different job. An unsettled labor supply introduces the same economic uncertainty as supply chain problems, further exacerbating the challenges for owners and tenants.
Next, perhaps the oldest of all challenges is back as well – war. How the Russian invasion of Ukraine will affect commercial real estate in the U.S. is anybody’s guess, given that the eventual outcome of the war is also anybody’s guess. Russian investment in U.S. real estate is certain to be restricted, but other foreign investment might go either way. On the one hand, focus on the war and its potential spillover risks may keep foreign money at home, particularly in Europe. But foreign investors also could see the U.S. as a safe haven, boosting investment.
Finally, the pandemic may be fading but its impact is still being felt beyond its impact on the supply chain. Mask mandates are gone, but the nation’s workforce is not ready to embrace a full return to the office. Instead, flexible schedules and work from home options appear on their way to becoming the new normal. A recent survey of industry concerns by Chicago law firm Seyfarth & Shaw, conducted before Russia’s invasion of Ukraine, ranked the pandemic fourth, behind inflation, supply chain, and labor market issues.
Of course, none of the above issues exist in a vacuum. Sanctions on Russia exacerbate oil prices, which in turn create added inflation pressure. Higher fuel costs affect delivery costs, prolonging supply chain disruptions. Continued high worker overturn makes it more difficult to have confidence in resurgent office use. As always, commercial real estate professionals will try to do their best to read the tea leaves of all the uncertainties buffeting the industry today to find the best path forward.
