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Nearly half of CFOs project revenue decline in commercial real estate

In the Deloitte Center for Financial Services’ recent survey, 48 percent of the commercial real estate chief financial officer (CFO) respondents said they expect revenue to decline in 2023 due to economic slowdown and climate regulatory action, leading executives to cut costs.

The Deloitte Center for Financial Services’ 2023 Commercial Real Estate Outlook is a global survey that was conducted among 450 CFOs of major CRE owners and investment companies. The respondents were asked to share their opinions on their organizations’ growth prospects and forward plans for workforce, operations, technology and culture. The Deloitte Center for Financial Services also asked the respondents about their investment priorities and anticipated structural changes in 2023.

Respondents were equally distributed among North America (the United States and Canada), Europe (the United Kingdom, France, Germany, and Switzerland), and Asia/Pacific (Australia, China Mainland, Japan, and Singapore). The survey included real estate companies with assets under management of at least $100 million. Deloitte said the survey was completed in June 2022.

Economic concerns

“Regardless of which scenario comes to fruition, the 2023 Deloitte real estate outlook survey reveals that concerns about the economy are top of mind for most global real estate leaders as they prepare for the remainder of 2022 and 2023,” the report said. “Revenue expectations for the full year are mixed among those surveyed, and generally more muted than last year.”

Along with the 48 percent of respondents who expect CRE revenues to decrease, another 12 percent expect no change, according to the report. That leaves 40 percent who expect an improvement in revenue compared to last year — a significant drop off compared to last year’s survey results when 80 percent of respondents expected revenue would be slightly to significantly better than the year before. Those expectations were based on improving upon a challenging 2020, however.

Meanwhile, given the muted revenue expectations, about one-third of respondents said they are planning to decrease costs compared to the year before, when just 6 percent expected to cut costs.  The CFOs surveyed pointed to sustained high inflation, workforce management and cyber risk as the top risks to financial performance in 2023.

Other key findings from Deloitte’s report are that CRE owners and investors are targeting offices and digital economy and logistics properties. Downtown and suburban offices rank first and third overall for global risk-adjusted asset class opportunities, according to the survey.

ESG remains a focus

Meanwhile, environmental, social and governance (ESG) remains a focus for many CRE companies, but they admit they need guidance on how to implement changes and track their progress. Just 12 percent of the entire industry surveyed and 17 percent of the required public real estate investment trusts (REITs) are ready to respond to regulatory action right away.

“The evolving global regulatory environment is expected to bring changes to tax structure and modernization to the forefront,” the report said. “Potential changes to transfer pricing and profit-sharing and increases in tax rates could have the greatest impact on CRE firms.”

The COVID-19 pandemic has made it challenging for businesses to bring employees back to their physical offices and in turn made it difficult for CRE owners to minimize vacancies. Now, more firms are taking regional approaches to attract and retain talent, according to the survey. Companies are focusing on increasing workplace automation, bolstering diversity, equity and inclusion initiatives, accelerating career growth opportunities and offering more recognition and awards programs.

“Occupancy levels in top US markets were 44% of pre-pandemic levels in July, and owners, investors and local governments are exploring ways to combat vacancies,” the report said. “Hybrid work is here to stay, and employees now expect top-of-the-line office space.”

Property technology, or proptech, could also play a role in CRE owners’ and companies’ fortunes. More CRE firms are looking at outsourcing opportunities to optimize operational capacities, and interest remains in leveraging proptech to help offer complementary, innovative services.

“While technology budgets tend to be more reserved, those who plan to increase spend have opportunities to improve efficiency and explore new revenue opportunities in fundraising and digital assets,” the report said.

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