Invest now to prepare for the future

Property owners need to start planning for the future despite the headwinds buffeting the real estate sector today.

London financial district with Royal Exchange and Bank of England
(Image credit: © Getty images)

The global commercial property market is at something of a crossroads. On the one hand, stringent planning conditions and high materials costs are having an impact on construction volumes. On the other hand, many of the biggest cities in the world are struggling to build enough homes and high-quality, fit-for-purpose offices. There is also growing demand for sustainable buildings with a low carbon footprint and infrastructure to support the transition to net zero.

Rising interest rates are only increasing the challenges for developers and owners. The cost of borrowing to fund new projects has jumped significantly over the past two years without including the rising cost of building.

The increasing cost of borrowing is already causing significant issues in some markets. The cracks are most notable in key US cities, where the high cost of borrowing – coupled with the increase in remote working (and resulting decline in rental values) – are acting as a perfect storm for property owners.

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The market is supported by strong fundamentals

In most regions, a growing deficit between supply and demand seems set to beset the construction market for years. In the West End of London, for example, landlord Great Portland Estates estimates supply of office buildings will exceed demand by more than 100% over the next couple of years.

London's policymakers are placing increasing emphasis on retrofitting buildings. Construction is one of the most carbon-intensive industries, and companies can reduce their carbon footprint by repurposing rather than demolishing and rebuilding.

As the world’s leading company delivering sustainable design, engineering, and consultancy solutions for natural and built assets, Arcadis produces an annual International Construction Costs (ICC) report, highlighting the scale of the challenge facing all of the property and construction industry’s stakeholders as the sector tries to reduce its carbon footprint. This year’s report, titled New Horizons, looks back at 2022, another highly disrupted year for the industry, including many of the challenges outlined above.

Arcadis’ research found inflation was one of the most pressing issues in most central locations last year. For the second year in a row, high levels of inflation proved to be a massive headwind for the sector, with fewer than 10 cities in the top 100 studied recording zero or negative inflation.

London is the world’s second most expensive place in the world to build, according to the report. Overall, seven of the top 25 most costly locations to build in the world are located in the UK and Ireland.

The New Horizons report also outlines the stark challenge the construction and property sectors face due to the rise of “stranded assets,” buildings at risk of becoming “functionally obsolete” due to new requirements to tackle climate change.

The time to act is now

Buildings need to be upgraded to avoid becoming obsolete, but with changing working practices and the growing cost of money, rising to the challenge isn’t going to be easy.

Arcadis’ research argues real estate investors and asset owners need to act sooner rather than later. Investors and owners might be tempted to wait for costs to come down before making the changes, perceiving it to be a lower cost and lower risk approach. This approach is misguided, according to the data in the New Horizons report, as the benefits of waiting to do something could be outweighed by the increasing demands that may materialise as the market stabilises.

New Horizons makes it clear the “cost of doing nothing” for real estate owners and investors is substantial, suggesting now is the time to act with the global real estate market at a turning point.

With cracks already starting to show in some parts of the market, investors and owners need to be thinking about upgrading today to move ahead.

With these changes in mind, Arcadis is helping property portfolio managers preserve the long-term value of their portfolios by devising a five-point action plan. It is designed to help managers identify and act upon all relevant issues that affect long-term returns and asset value.

The five steps are: Planning ahead for changes in regulation and governance; identifying and quantifying the full range of risks to a property portfolio; tracking and adapting to changes in user demand; identifying opportunities to reposition assets; and building and measuring a benefits case for investment.

While there are undoubtedly real and significant challenges facing the construction sector, those companies that dare to be bold and embrace the opportunities the net zero revolution provides will be the ones to thrive.

  • Download your copy of the report here
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