2024 commercial real estate outlook: Finding terra frma

Deloite Center for Financial Services

Deloitte. Insights

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02 . . . Key takeaways

03 . . . Getting back on solid ground

04 . . . Concerns about a slowdown further weigh on industry revenues and spending

07 . . . Shifting structural expectations across the property markets

16 . . . Constructing a sustainability strategy to transition to a low-carbon future

20 . . . Deepening tax comprehension to help strengthen the bottom line

23 . . . Evolving hybrid work and transforming operations

28 . . . Enhancing real estate technology capabilities through speed and interconnectivity

32 . . . Building on a stronger foundation for the future of commercial real estate

33 . . . Endnotes

KEY TAKEAWAYS

Expense mitigation is a top priority for most respondents; revenue expectations dropped to their lowest level since we began our survey in 2018. Top areas for expense mitigation are in talent and ofce space.

Respondents point to cost of capital and capital availability as the weakest among real estate fundamentals. About half of respondents expect cost of capital (50%) and capital availability (49%) to worsen through 2024, up from 38% and 40%, respectively, last year.

Many real estate frms aren’t ready to meet environmental, social, and governance (ESG) regulations. Nearly 60% surveyed say their frms lack the data, processes, and internal controls necessary to meet compliance standards.

Most respondents say they plan to use outsourcing to drive efciency. Their primary goals are gaining technological capabilities to streamline processes and adding agility and resilience to their operations.

Real estate frms should address years of amassed technical debt by ramping up technology capabilities. Most respondents (61%) admit their frms’ core technology infrastructures still rely on legacy systems, but nearly half are making eforts to modernize.

Geting back on solid ground

Dear colleagues,

Continuing to confront multiple challenges and shifting expectations, in 2024, the global real estate industry has an opportunity to start rebuilding on more solid ground. Multiple factors, from a pandemic-era recovery that shifted how and where people work to more recent geopolitical uncertainties and fnancial market instability, the coming year is expected to be pivotal in real estate frms’ ability to recover and build up. Marked by a myriad of mixed signals about the health and trajectory of our industry, real estate leaders may need to fnd their footing as they shape the next phase of real estate ownership and investment.

The coming 12 to 18 months are expected to be important as real estate frms reposition themselves, and it might take a combination of critical realizations and strategic realignments, some far diferent from the status quo, to get there.

This year’s commercial real estate outlook aims to help leaders fnd terra frma—solid ground—that the industry can build upon to meet new foundational realities.

In this year’s report, we advise leaders on how they may be able to establish more efcient, sustainable business through proactive property portfolio structuring and risk mitigation, value creation through green and decarbonization initiatives and tax incentives, and by transforming operations and technology.

The backbone of our report is our annual Global Real Estate Outlook Survey, which reveals what is top of mind for real estate owners and investors across North America, Europe, and Asia/Pacifc. Our survey fndings are supported by frsthand experience and insights by leaders at select Deloitte real estate clients and by many of Deloitte’s own subject matter specialists and research leaders at the Center for Financial Services.

We hope you fnd our insights and guidance useful and thought-provoking as you begin your strategic planning for the remainder of 2023 and into 2024. We welcome any opportunity to discuss our fndings with you and your organization.

Sincerely,

Jef Smith

US Real Estate leader

Partner, Deloitte & Touche LLP

Kathy Feucht

Global Real Estate leader

Partner, Deloitte & Touche LLP

Concerns about a slowdown further weigh on industry revenues and spending

round the globe, economies remain afoat despite months of warning signs, with lingering uncertainties buoyed by pockets of clarity. Global economies continue to face multiple headwinds heading into 2024: the continued

confict in Ukraine, extreme weather catastrophes, population migration trends, a weaker-than-expected economic recovery in Mainland China, and ongoing risks of fnancial stress from tightening monetary policies.1 But proactive policy response to the banking turmoil in early 2023, resilient consumer demand, and a stabilization of energy and food prices seem to have settled some nerves.

Regardless of what economic forecasts might come to fruition, Deloitte’s 2024 Real Estate Outlook survey reveals that concerns about the state of the economy will likely continue to be a primary factor in global real estate leaders’ decision-making through 2024 and beyond. The survey includes strategic insights from 750 chief fnancial ofcers (CFOs) and their direct reports at major real estate owner and investor frms in 11 countries (see sidebar “Methodology”).

In this year’s survey, revenue expectations fell for the second straight year: Sixty percent of respondents expect declining revenues for the remainder of 2023, compared to 48% last year. Respondents from Europe (66%), North America (60%), and Asia/Pacifc (53%) were the most likely to expect falling revenues (fgure 1).

With revenue expectations muted for the second straight year, real estate CFOs who participated in our survey plan to continue reducing expenses. Two years ago, only 6% planned to make expense cuts; in 2023, 6% said they’d be cutting; now, 40% say they plan to further reduce spending into 2024. The primary functional areas targeted by respondents for expense reduction will likely be talent (49%) and ofce space (46%).

METHODOLOGY

The Deloite Center for Financial Services conducted a survey of 750 CFOs and their direct reports at major commercial real estate owners and investment companies around the world.

Respondents were asked to share their opinions on their organizations’ growth prospects and workforce, operations, and technology plans through 2024. We also asked about their investment priorities and anticipated structural changes for the coming 12 to 18 months.

Respondents were distributed among three regions: North America (the United States and Canada); Europe (the United Kingdom, France, Germany, the Netherlands, and Spain); and Asia/Pacifc (Australia, Japan, Mainland China, and Singapore).

The survey included real estate companies with assets under management of at least US\$50 million and was felded in June 2023.

What is your revenue forecast for the remainder of this year compared to last year?

Figure 1

Across regions, most respondents are bracing for even lower revenues in 2023

Notes: Percentages may not add up to 100% due to rounding, results compared against prior year's 2023 Real Estate Outlook Survey responses. Source: The Deloi€e Center for Financial Services 2024 Real Estate Outlook Survey.

Source: The Deloiše Center for Financial Services 2024 Real Estate Outlook Survey.

Figure 2

Globally, respondents’ concerns around rising interest rates and the infated cost of capital are top of mind, placing them near the top of all macroeconomic trends that could most impact fnancial performance for the next 12 to 18 months. Rising interest rates marked the largest year-over-year increase of all responses, jumping 10 spots from last year’s survey to third this year (fgure 2). Of the new options added to this year’s responses, cost of debt emerged as ffth globally and was ranked among the top third in two of the three regions. In Asia/Pacifc, the new option of redemption queues/short-term liquidity concerns ranked frst in this year’s survey.

Respondents globally grew most concerned about cyber risk, identifying it as the most likely trend to impact their fnancial performance, especially in Europe, where nearly half of the respondents chose this option (fgure 2). This was anticipated as the real estate industry increasingly incorporates smart technologies into their buildings and thus, now faces asset-level vulnerabilities.2

Macroeconomic factors and cyber risk are top concerns through 2024
Which poses the greatest risk to your institution’s financial performance over the next 12 to 18 months?

By region

NorthAmerica

Europe

Asia/Pacific

Climate-elatedregulatoryaction

③

3Ri

sing interest rates

一

Su5

stained hig infation

Cost ofcapital

8910

pply chain disruptions

④

gional plicl istalty

②

Redemptionqueues/ort-termliquidity concerns

Capita

avalal

①

Climate

change

Acceleraingtechnologycapabities

1②

Currency volatilty

Employe etention

②

③

Notes: Respondents could make multiple selections, blank indicate response options that were not included in last year’s survey, results compared against prior year’s 2023 Real Estate Outlook Survey responses.

Shifing structural expectations across the property markets

his year’s survey results show the largest share of respondents expecting real estate property sector’s fundamental conditions to worsen since we began the survey in 2018. Following the second straight year of expected revenue declines, additional

expense reduction measures, and tightening business operations, respondents overwhelmingly say they expect worsening leasing fundamentals such as vacancies, leasing activities, and rental growth over the next 12 to 18 months (fgure 3A). Some respondents believe real estate capital markets may be nearing a market bottom. The same percentage of respondents, compared to last year, expect property pricing and transaction activity to worsen.

Some of the largest annual changes in fundamental expectations were capital availability and cost of capital (fgure 3B). Respondents who were expecting worsening cost of capital increased from 38% last year to 50% this year, and those expecting worsening capital availability increased from 40% to 49%. These expectations likely refect central banks’ eforts to reduce infation by hiking interest rates, combined with lenders tightening their underwriting standards. Increases in global interest rates have increased the costs of fnancing: Average US commercial mortgage rates topped 6.6% as of the second quarter, nearly double the 3.8% rate at the beginning of 2022.3 Lenders also seem more cautious amid slowing economic growth expectations. A net of 67% of bank lenders surveyed by the Federal Reserve in April 2023 are tightening lending standards for commercial mortgages, up from a net of 9% that were actually planning on loosening standards at the end of 2021.4 Some lenders have retreated altogether, with unique lender counts dropping across most major property sectors so far into 2023.5

Facing tightening loan standards, fewer lenders, and higher borrowing costs, commercial real estate buyers could have more difculty deploying capital for purchases in 2024. Property sales volumes dropped by 59% globally, 63% in the United States, 62% in Europe, and 50% in Asia-Pacifc so far through 2023.6 Already in play was nearly US\$900 billion in loans set to mature over the next two years in the United States.7 These mortgage maturities could also face difculties in refnancing in the current lending environment of high borrowing costs and risk-averse lenders. Commercial mortgage-backed securities (CMBS) and collateralized loan obligation lenders are behind more than half of the total loan maturities coming due in 2023 alone.8 Delinquencies on CMBS loans saw a noticeable increase in June 2023, up 28 basis points (bps) to 3.9%.9

Figure 3A

More respondents expect fundamentals to worsen than in all prior Real Estate Outlook surveys

Changes anticipated in property sector fundamentals over the next 12 to 18 months

Notes: Percentages may not add up to 100% due to rounding, the Real Estate Outlook Survey was introduced in 2018. Source: The Deloi€e Center for Financial Services 2024 Real Estate Outlook Survey.

Figure 3B

More respondents expect fundamentals to worsen than in all prior Real Estate Outlook surveys

Source: The Deloie Center for Financial Services 2024 Real Estate Outlook Survey.

Notes: Respondents could make multiple selections, results compared against prior year’s 2023 Real Estate Outlook Survey responses.
Source: The Deloi‘e Center for Financial Services 2024 Real Estate Outlook Survey.

Which asset classes present the most attractive risk-adjusted opportunity for real estate owners and investors over the next 12 to 18 months?

As real estate owners and investors weigh weakening economic growth sentiments and corresponding shifts in property fundamental expectations, their top property sector targets are changing. When respondents were asked which property types present the most attractive risk-adjusted opportunity over the next 12 to 18 months, digital economy properties (defned as data centers and cell towers) topped the list for all three global regions (fgure 4). Both suburban and downtown ofce sectors dropped signifcantly since last year, which refects how frms continue to grapple with hybrid work expectations. Downtown ofce dropped from frst overall globally last year to 10th this year. Suburban ofce dropped fve spots as well, to seventh.

Alternative sector opportunities, those not in the “core four”—ofce, retail, industrial, and multifamily—gained ground in this year’s survey; three are now in respondents’ top fve targets. Single-family rentals (SFRs) and build-to-rents (BTRs) jumped fve spots to second overall, closely followed by senior care (third) and life sciences (ffth). The greatest year-over-year increase came from self-storage properties, jumping six places from 14th to eighth overall, carried by respondents in North America.

Here’s a closer look at changes to individual property type expectations for the coming year:

Ofce

How we got here

Remote working has disrupted demand for ofce spaces across the industry. Despite the addition of over two million in-ofce jobs in the United States alone since 2020, the sector still shed nearly 200 million square feet of occupied space10 and, on average, has experienced nearly 10% in asset value declines11 over the same period. Further gripped by greater economic uncertainty through early 2023, occupiers of commercial space have exhibited caution in new lease signings. This has driven vacancies upward across the globe, topping 15.6%, led by quarterly increases in North America (+53 bps) and Asia/Pacifc (+42 bps) followed by Europe (+10 bps).12 As a result, ofce property valuations slipped down by 4.5% globally, topped by North America (5.9%) and followed by Asia/Pacifc (3.4%) and Europe (2.0%).13

However, all things have not been equal across the real estate sector. Newer, high-quality assets continue to signifcantly outperform the rest as the fight to quality accelerates.14 Estimates suggest that new construction designed to accommodate hybrid work strategies has absorbed more than 100 million square feet of unused space. And while many regions still struggle with price discovery due to falling investment activity, the value gap between better-quality and lower-quality assets has clearly widened.15

A new foundation

Through early 2023, we may have gained more clarity on what realistic, stabilizing ofce space utilization rates across the globe might look like. On average, US ofce space utilization has steadied at just under 50% of prepandemic levels, compared to 70% to 90% in Europe and 80% to 110% in Asia/Pacifc.16 Global variations can be attributed to varied housing formats, commute times, and labor markets.17

Real estate ofce owners and investors should acknowledge that hybrid work is here to stay. It is shifting how ofces are used and valued, so valuation strategies should change as well. Now almost three years into assessing pandemic-era space requirements, ofce occupiers have more insight into how much ofce space they may need. According to CBRE’s most recent ofce occupier survey,

60% of US respondents believe their ofce utilization has stabilized, up from 43% who expected to reach a steady state in 2022.18 Those who still expect further utilization increases are primarily from frms with the lowest current utilization rates, and 71% of respondents expect their companies to reach steady state by the frst half of 2024.

The ofce sector should be rebalanced, similar to what regional malls faced several years ago.19 Real estate services frm Cushman & Wakefeld estimates that nearly 60% of existing US ofce inventory needs reinvestment or to be upgraded, with another 20% being completely undesirable without major work.20 At this stage, ofce owners and investors should be realistic about what to do with underperforming assets. They could consider adaptive reuse, conversion to meet higher-quality demand or sustainability regulations, or, if conversion wouldn’t be cost-efective, outright demolition. As we discussed in Deloitte’s 2023 FSI Predictions, should market fundamentals further deteriorate for the ofce sector, coupled with sustained stability in the multifamily sector, ofce-to-residential conversion opportunities could become a broadly viable option by 2027.21

Retail

How we got here

Following a near-historic retreat in consumer sentiment in early 2023, retail conditions are trending upward recently. In the United States, July marked the second consecutive month consumer sentiment rose, as eforts to tame infation have so far been successful.22 Deloitte’s State of the Consumer Tracker shows consumers globally have consistently improved their fnances; only 35% of respondents feel their fnancial position worsened over the past year through late June, down from 41% in February.23

Retail tenant demand has maintained momentum due to several years of industry transformation and larger retailer consolidations in higher-quality locations, despite varying degrees of health from economic indicators. According to Coresight Research, US store openings outpaced store closings by over 1,500 stores in 2022, and just under 1,000 stores so far through 2023.24 Leasing activity has generally remained positive across North America, Europe, and Asia/Pacifc.25

A new foundation

Despite several prominent retailers fling for bankruptcy over the past year, there is still healthy demand and landlords remain optimistic they can still quickly fll vacancies and push rents higher.26 This resiliency speaks not only to the retailers themselves—those who survived a pandemic and have generally built more robust operations with stronger fnancials—but also to the state of retail development and the favorable balance of supply and demand.27 While other sectors have gone through supply-side booms over the past few years, new retail development is still structurally restrained due to limited new constructions and demolitions from widespread store closures during the late 2010s.

E-commerce should be a tailwind for growth. Six in 10 retail executives foresee strengthening digital commerce oferings as a top opportunity,28 but the pace of growth has normalized from highs during the heights of the pandemic. Upgrading physical locations with better digital capabilities can help retailers achieve greater success. Retailers that can continue to build more robust efciencies across last-mile distribution capabilities, omnichannel logistics, and e-commerce presence could defne the next era of tenants. Landlords should be keen to lure these retailers into their locations.29

Industrial

How we got here

Boosted by growing e-commerce and third-party logistics providers, along with investments in reshoring initiatives to bolster stretched supply chains and domestic manufacturing, sustained demand for industrial locations has still led to high competition for existing space. Spending on consumer goods during the pandemic pushed demand for warehousing and manufacturing space to new heights. Absorption doubled in 2021 compared to the 2015–2019 average and exceeded that prior average by over 60% in 2022.30 To help meet this demand, a record amount of new construction is scheduled to begin by the end of 2023. But some markets are still supply-constrained and have near sub-1% vacancies. As a result, rent growth continues: 18.6% in North America, 10.8% in Europe, and 6.4% in Asia/Pacifc year-over-year in mid-2023.31

A new foundation

A record industrial construction pipeline aims to address the vast supply/demand imbalance. Regulatory incentives are helping, too. Notable incentives are energy credits and tax deductions from the Infation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors Act (CHIPS Act). Other actions to better balance supply with demand include transitioning to new transportation and energy technologies and nearshoring global supply chains for more responsive operations.32 But this construction boom could face two potential threats: frst, a lack of available land to build, particularly “megasites,” 1,000+ acre plots of land that have transit access near a skilled labor pool; and second, a robust-enough energy infrastructure to support these facilities.33

Megasites are custom-designed to meet the needs of a single occupier. These often have expedited development timelines, especially where time-sensitive tax incentives are in play. Megasite users have come to expect shovel-ready sites, but in the United States, fewer than two dozen sites like these are left.34 Land options become even more scarce for factories needing access to substantial sources of electricity, such as chip manufacturers and electric vehicle battery plants. Finding the right mix of conditions in breaking ground for new megasites could become more difcult. As a result, developers have faced costly extensions to project timelines for much-needed inventory. This, too, has contributed to higher rents.35

Residential

How we got here

On the heels of interest rate hikes, home sales reversed from the pandemic-era boom and pockets of home pricing corrections have emerged. Yet, despite these price drops, infated mortgage costs and accessibility to capital have kept buyer activity muted.36 As a result, the outsized demand for multifamily rental properties that started during the pandemic continues. Most US markets have seen rent growth top 20% since 2019.37

Accounting for regional variances in common mortgage structures, household incomes, and central bank policies, a recent report categorized the progress of developed housing markets across the globe into three segments: early adjusters, bullet dodgers, and slow movers.38 Canada and Australia fell into the early adjuster camp; in these countries, buyers leveraged more accessible variable-rate mortgage terms during the pandemic, when credit was cheaper. Since then, they have experienced some of the steepest pricing corrections to date. The United States and France have seemingly dodged a few bullets: Most US homeowners hold long-term fxedrate mortgages following the housing crisis in 2008. And among homeowners in France, there is very little household debt.39 These two markets have not seen signifcant, widespread price defation so far through 2023 compared to other global regions. The United Kingdom and Germany are still in much earlier stages of housing volatility. Pricing is only starting to turn, but developers are beginning to worry as housing purchase demand wanes.40

A new foundation

Afordability will likely continue to be a fundamental issue that impacts global housing markets, especially among renters and frst-time homebuyers. How municipal and federal governments respond could be pivotal in addressing housing supply and demand. Enacting policies that allow for more favorable zoning, such as allowing for more units to be constructed on a single lot, as well as fnancial incentives like low interest loans or tax abatements, could help.41 But so far, infexibility at local levels has prevented measures like this from being adopted more broadly.42

The supply of new, afordable inventories will likely still be limited across many parts of the world due to infated construction costs and difculties obtaining development fnancing. US housing construction is expected to bounce back, but not until 2025, when forecasts suggest it could reach around 1.5 million units delivered per year.43 With the mismatch in global supply and demand for home purchases, multifamily rentals could still serve an accessible outlet for housing for those priced out of the market.44 As consumers continue to live in rental units waiting for their chance to buy, demand for multifamily rental properties could continue to be strong.

Hotel

How we got here

Vaccine rollouts and easing travel restrictions have helped the hotel industry steadily rebound. Benefting from pent-up lack of leisure travel, the average revenue per available room exceeded prepandemic levels in the Americas (+14%) and Europe (+13%) but is still behind in Asia/Pacifc (-7%).45

Hotel operators are increasingly concerned about “the quality equation”: balancing top-of-the-line service oferings while they face continued stafng shortages and supply chain limitations.46 At the end of 2022, the hospitality labor force was only 84% of prepandemic levels, and rising materials costs and limited fnancing options have delayed needed renovations and limited owners’ and operators’ abilities to invest in upgrades.47 This, combined with the increased cost of service, could have travelers questioning the value they received for their money.

A new foundation

The demand for hotel space is on the brink of a full global recovery, but with the reemergence of leisure travel comes a greater expectation per dollar spent.

The days where travelers gave operators a pass on the price-versus-experience equation due to the pandemic, infation, or labor shortages are likely over.48 As travelers become increasingly price-sensitive amid fnancial instability, hotel operators should meet their customer’s experience expectations head-on or they could risk losing them.

Corporate travel still lags behind as part of the recovery. While leisure travelers outnumbered business travelers, the latter historically contributes much more to bottom lines.49 If, by the end of 2024, companies recover to 2019 business travel spending levels, when adjusting for infation, corporate travel could likely settle about 10% to 20% lower than it was prior to the pandemic.50 The United States and Europe are on similar recovery trajectories: In both markets, corporate travel spending is expected to reach only two-thirds of prepandemic levels by the end of 2023. A full recovery to 2019 corporate travel spending is not expected in the United States and Europe until late 2024 or early 2025.51

Alternatives: Digital economy, specialty housing, and life sciences

Digital economy

Hyperscale tenants, those that manage large-scale computing resources, dominated digital economy property demand again in 2022. Since then, they’ve started to expand into secondary and emerging markets. But in more developed regions, they may face limited land availability and power cost increases, limiting expansion opportunities. The sector has been at the mercy of utility price volatility, brought on by geopolitical instability in Europe, with median electricity costs increasing 16% last year.52 As the network of data center properties expands further to meet the growing needs of the digital landscape, fber density and quality, as well as cloud availability, could be key drivers in locating new facilities.53

Single-family rentals/build-to-rent

Rent growth for existing single-family rentals has slowed. Eroding afordability is leaving fewer funds available for renters to meet more cost increases. Though rent growth has fattened out of late, rather than declined, it could be more likely that the 26% rent growth since the onset of the pandemic has likely become the new baseline.54 BTR home construction, on the other hand, is still thriving. Developers targeting this space are taking advantage of demand for those looking for private homes but want to wait for the dust to settle before committing to buying.55 In Europe, investors seeking further housing diversifcation outside of traditional multifamily have turned to these niche rental housing sectors. The United Kingdom has been the primary target; capital topped US\$3.5 billion by June 2023, placing it second globally behind the United States.56

Senior housing

The perpetual demand due to an aging populace should sustain the senior living sector. Older populations around the globe are growing in number and proportion at a faster pace than historically. Between 2015 and 2050, the share of global populations 60 years and older is expected to nearly double, from 12% to 22%. By 2030, one in six people will be aged 60 or older.57 Revenue opportunities for the sector are expected to grow more than 6.5% over the next fve years, but could end up lower because of increased operating costs and stafng shortages.58 In the long run, senior housing margins could beneft from adding more inventory and more diverse product oferings, such as active adult communities or ultra-luxury retirement facilities.

Life sciences

The exponential growth trajectory for the life sciences sector realized during the height of the pandemic has leveled of so far into 2023, though demand for space is still outpacing prepandemic levels.59 More recent economic headwinds, particularly in the banking sector, have paused some venture capital funding of life science companies, although levels still remain well above prepandemic funding by about 15%.60 Vacancies are expected to increase as record new construction comes online to meet demand, but should still remain well under long-term average vacancies, further propping up rental growth. The continued confdence in the underlying demand for medicines should drive optimism for life science users over the next several months,61 even though capital infows from public and private sources could be tested again if volatility hits fnancial markets.

Actionable guidance to consider

Property market trajectories have been uneven; some sectors may now face new foundational expectations and realities. Going forward, real estate leaders should focus on mitigating risks and enhancing operational and regulatory resiliencies. Depending on capital structure, investor expectations, and risk tolerance, investment leaders at real estate frms can take a conservative or proactive approach:

Conservative

Alternative capital sources: Firms can use mezzanine and preferred debt to fll short-term voids in available capital from the potential retreat of bank lenders who choose not to lend in a riskier capital markets environment.

Tenant priority/mix: Pacing rent growth with infation can help sustain cash fow but should be balanced with tenant relationship management. Owners/investors should work with tenants to ensure their needs are being met. Also, this could be a good time to sign on credit tenants to ensure a stable tenant mix.

Risk management: Ramifcations of loan defaults by owners and developers could impact employee retention and shareholder value. They could leave businesses as vulnerable as the buildings themselves.

Patience and thorough due diligence: Higher interest rates have already had some impact on asset pricing. Real estate leaders may need to be even more careful about site selection and asset quality to protect nearterm stability and long-term performance.

Proactive

Negotiating power: Conventional lending is tight right now. Debt investments could be used to access real estate investment opportunities and ofer more term fexibility than traditional sources.

Diversifcation through alternatives: For those looking to deploy capital, nontraditional property types may ofer stability through diversifcation. From our survey, four of the top fve target property sectors for owners and investors over the coming 12 to 18 months are outside the core asset classes (ofce, retail, industrial, and multifamily).

Risk management: Being transparent with shareholders and investors may engender or reinforce trust. This should include being realistic about mark-to-market adjustments.

Buy opportunities: What purchase opportunities could come from potential further asset devaluations? Low leveraged, highly liquid owners/investors who have been in recession planning over the past three to four years may already be looking for an entry point. In a decelerating treasury yield environment, savvy investors may look to fll the buyer void. This could present opportunities for investors seeking yield through real estate.

INDUSTRY LEADER PERSPECTIVES: HOWARD HUGHES’S JOHN SAXON ON THE IMPORTANCE OF LOCATION AND THE MIXED-USE ENVIRONMENT

“Location is certainly a key defning factor. We see a bifurcation of occupancy between central business districts and suburban assets. Typically, vacancies are rising in areas around today’s CBDs, whereas buildings that are located in highly amenitized areas in more open, natural setings are seeing an increase in leasing activity and showing higher occupancy rates. Our communities, which ofer vibrant mixed-use environments outside of denser downtown metro areas, are seeing incredible leasing activity and a diversifed tenant mix because of their ideal location.”62

—John Saxon, chief of staf, Howard Hughes Corporation

Constructing a sustainability strategy to transition to a low-carbon future

Sustainability as a tool for value preservation

he real estate sector is witnessing increased bifurcation. In the United States, sustain-T ability credentials within real estate assets are now synonymous with premier Grade A ofce space commanding 31% higher annual rents. When adjusted for build-

ing age and location, the rent premium is 3% to 4%.63 Investors are becoming increasingly cognizant of property sustainability, and how comprehensive and verifable reported metrics are for these assets can be the reason why many choose to invest or not.

INDUSTRY LEADER PERSPECTIVES: BXP’S MIKE LABELLE ON SEAMLESSLY INCORPORATING SUSTAINABILITY INTO PORTFOLIO STRATEGY

“We have been investing in our buildings and ESG has been a core principle of our strategy. We have an annual capex budget for our buildings that includes upgrading on a consistent basis, and we will continue to do that to meet standards. I think that green energy is going to be part of the future in a bigger way. For some communities where it’s hard to get access to green energy directly, we’ve purchased green energy ofsite, and we’ve been doing that for a while. Our goal is to get our portfolio fully green. We have a net-zero goal set for 2025 for scope 1 and 2 and we’ve got a strategy to get there.”64

—Mike LaBelle, chief fnancial ofcer, BXP

Managing capital expenses to better mitigate physical and transition risk should be considered over the life cycle of investment into a building, from acquisition to sale. Owners and investors should consider how capital expenditures are being utilized to mitigate climate risk and build resiliency. Building owners who rely on outdated mechanical building systems may fnd it increasingly expensive and difcult to operate, especially in a more stringent regulatory environment where owners could face penalties for noncompliance.

According to estimates, close to 76% of the ofce supply in Europe could face obsolescence by the end of the decade if it is not upgraded.65 Nearly half of survey respondents believe the greatest material risk to investing in sustainable real estate is maintaining real estate asset valuations that do not appropriately consider climate-related risk.

Sustainability in building operations

Almost 80% of the predicted building stock for 2050 in some of the world’s largest business districts has already been constructed. This contributes to the thought that monitoring and reducing carbon emissions from existing structures should be the most impactful area in meeting decarbonization targets.66 An evolving regulatory environment may be the impetus real estate leaders need to act on, with focus on energy performance and emissions increasing in scope and stringency. The City Council of Sydney has imposed a minimum National Australian Built Environment Rating System energy requirement of 5.5 (0 being least sustainable and 6 being most sustainable) on new commercial buildings starting in January 2023 with net-zero carbon emissions targets by 2026.67

Over the past several years, leaders at major real estate frms have taken small steps to reduce their carbon footprint, ranging from installing clean, energy-efcient equipment such as heat pumps, and emerging digital solutions such as Internet of Things (IoT) devices and AI-based applications.

Tracking and reporting data on tenant-owned space is also becoming important. Scope 3 emissions account for indirect emissions not owned or controlled by the frm, including tenant-owned areas. To be successful, a sustainability strategy should include green lease clauses, including submetering of the leased area, client energy disclosures, and cost sharing for capital expenditures made to improve energy efciency. Green leases should be looked at as an opportunity, not a challenge.

Whole-life carbon assessments should become the standard

Whole-life carbon emissions (WLC) are the total amount of carbon a building produces over its entire life cycle. With the goal of net-zero, WLC assessments should be integrated at the design and planning stage to be leveraged throughout the life of the building. Building material databases like Embodied Carbon in Construction Calculator68 or The Structural Carbon Tool69 can benchmark embodied carbon and optimize material usage to reduce the carbon footprint. Pivoting to innovative building materials such as smart glass, low-carbon alternatives like engineered timber or cross-laminated timber, and low emissions cement can aid in reducing carbon emissions. Procurement policies for embodied carbon have been introduced across several states in the United States. In 2022, Vancouver, Canada, also passed a plan to reduce embodied carbon in large new buildings by 40% by 2030.70 The European Union (EU)71 and the United Kingdom72 are also turning their attention to WLC levels.

Estimates suggest that around 2.6 trillion square feet will need to be constructed by 2060 to meet the housing needs of growing global populations.73 And waste from new construction is expected to cross 2.2 billion tons every year by 2025,74 with more than 75% of all construction waste deposited into landflls.75 When rebuilding, cities across the globe are favoring deconstruction rather than demolition76 in part because it tries to salvage and reuse original building components instead of destroying them. For example, in the United States, some leading institutions have set a variety of WLC targets to build more sustainable business for the future. BXP has set a target of minimum construction and demolition debris diversion rate of 75% for all new construction and renovation projects,77 while Kilroy Realty has set an embodied carbon reduction target of 30% by 2030 at new construction projects.78

Many real estate frms lack internal controls they need for compliance

Sustainability-related regulations across the globe are evolving and will likely require frms to include detailed ESG metrics in corporate disclosures with similar levels of transparency as fnancial reporting.79 According to our survey results, 59% of respondents say they do not have the data, processes, and internal controls necessary to comply with these regulations and expect it will take signifcant efort to reach compliance (fgure 5). European frms appear to be slightly more prepared: Fifty-four percent of respondents in Europe expect compliance to be a challenge compared with 65% in North America and 58% in Asia/Pacifc. As real estate frms integrate sustainability performance and resilience metrics into their corporate disclosures, it will be important to ensure data integrity and accountability of internal controls.

Actionable guidance to consider

To build, operate, and dispose of buildings more sustainably, real estate leaders should consider:

Conducting materiality assessments and identifying business priorities that may impact operating performance to reach sustainability targets. Real estate frms operating in the EU will need to start reporting on nonfnancial themes based on their materiality under the Corporate Sustainability Reporting Directive in 2024.80 More than 46% of survey respondents say they have already conducted materiality assessments, while another 40% say they plan to undertake materiality assessments over the next year.

Ensuring sustainability metrics are comprehensive and verifable. Measuring and benchmarking greenhouse gas emissions and overall building performance and integrating climate innovation— transformative models incorporating new technologies and innovative business solutions aimed at reducing carbon emissions—should be a strategic priority to retain property values. Investing in connected IoT devices/smart technologies to control and track consumption was the top sustainability-related strategy identifed by our survey (45% of respondents).

Investing in sustainability risk management measurement capabilities. Firms should turn to comprehensive scenario analyses and test assetlevel preparedness and long-term resiliency. For instance, they can factor in associated cost implications of increased cooling or heating requirements anticipated due to heatwaves, wildfres, drought conditions, snowstorms, or fooding. Transition risk may involve signifcant expenses in carbon pricing; this may become relevant in the future for frms with high energy consumption and reliance on fossil fuels. In our survey, 44% of respondents say they are most likely to invest in risk management measurement capabilities related to physical and transition risk over the next 12 to 18 months (fgure 6).

Accelerating the shift to clean energy solutions. Mapping out a successful decarbonization strategy involves transitioning to clean energy sources, both onsite and ofsite. Buildings account for almost 30% to 34% of global energy consumption.81 In 2021, the real estate sector accounted for 26% of global energy-related emissions, of which 8% were related to the use of fossil fuels in buildings (direct emissions)82 and 19% related to generation of electricity and heat used in buildings (indirect emissions). Carbon emissions from the real estate sector should aim to decrease by more than 50% by 2030 (9% per year on average) to hit a fully net-zero target by 2050.83 More than one-third (38%) of survey respondents say their frms will likely install or procure renewable energy capabilities over the next year.

Figure 6

Leaders are considering a wide array of sustainability initiatives for the future of their buildings

What sustainability-related strategy initiatives is your firm most likely to take over the next 12 to 18 months?

Investing in connected Internet of Things devices/smart technologies to control and track consumption

Investing in risk management measurement capabilities related to physical and transition risk, including those that assist with climate-related scenario analysis

Incorporating climate resiliency from physical and transition risks into real estate development or redevelopment activities

Installing or procuring renewable energy capabilities such as wind and solar

Investing in data management tools to account for greenhouse gas emissions, water, and waste

Purchasing or monetizing renewable energy credits and/or carbon offsets

Undertaking or evaluating capital projects in which decarbonization is a key element of the investment strategy

Leveraging tax strategies such as incentives and credits

Setting decarbonization goals and targets

Note: Respondents could make multiple selections.

Source: The Deloie Center for Financial Services 2024 Real Estate Outlook Survey.

Deepening tax comprehension to help strengthen the botom line

Leveraging credits and incentives to drive ROI

s the focus on expense mitigation continues into 2024, real estate tax leaders are increasingly exploring ways to reduce their tax obligations to support stronger bottom lines. Survey respondents are growing more concerned about the

possible elimination of, or reduction in, tax allowances and benefts, with half of the real estate owner and investors selecting it as the most concerning potential change to tax structures (fgure 7). This concern was the top response among respondents in Europe (56%) and North America (47%), and second in Asia/Pacifc (47%). On average, it was identifed as a top concern, 10% more this year than last. In Asia/Pacifc, half of respondents say changes to transfer pricing/proft sharing is their top tax change concern.

These results highlight the importance that tax incentives play in supporting stronger fnancials, especially among those prioritizing the use of credits and incentives. Here are a few of the initiatives that are expected to impact real estate companies in the coming months:

The Infation Reduction Act (IRA) clean energy tax credits and incentives. As part of the IRA of 2022, enhanced tax credits and deductions are available for taxpayers that ensure the payment of prevailing wages for laborers and mechanics and the use of qualifed apprentices in the construction of facilities or installation of energy-efcient commercial building properties. Compliance with these wage and apprenticeship provisions became efective on January 29, 2023, for facilities or installations on which construction began on or after that date. The IRA expanded, enhanced, and introduced several credits for investments in or production of clean energy, some of which may be transferrable and, thus, more accessible to real estate companies, such as real estate investment trusts (REITs). It also extended certain energy credits and increased the types of eligible technologies. The IRA provides incentives for energy efciency upgrades to commercial real estate buildings, which may reduce the costs associated with and increase demand for improved energy efciency in new building construction and retrofts.

The Green Deal Industrial Plan. In early 2023, the European Commission proposed the Green Deal Industrial Plan, which would loosen state aid rules through 2025 to allow EU governments to subsidize investments in renewable energy or decarbonization initiatives.84 The plan would ofer faster permits to manufacturers of key climate technologies and establish a European Sovereignty Fund to invest in emerging climate technologies. Funding will be provided among others by what remains of the EU’s US\$872 billion postpandemic recovery fund.

Kicking of the global minimum tax

What’s in store

In late 2021, more than 135 countries agreed to the Organisation for Economic Co-operation and Development’s (OECD’s) proposed 15% global minimum tax, or “Pillar Two,” for large multinational enterprises.85 Each global member jurisdiction can decide whether to enact this framework into its domestic legislation. However, the rules are designed to impact the operations of large multinational enterprises even

Real estate CFOs are most concerned about losing tax allowances or benefits

Which of the following potential tax changes is of most concern to your organization?

Note: Respondents could make multiple selections.
Source: The Deloie Center for Financial Services 2024 Real Estate Outlook Survey.

in those countries that do not incorporate the rules in domestic legislation. Early in 202386 and again in July, the OECD released technical guidance to assist governments and taxpayers with the implementation, with some countries slated to apply these rules beginning in 2024.87 South Korea, Japan, and the United Kingdom have enacted Pillar Two model laws, and other jurisdictions have proposed laws that are efective January 1, 2024. An EU directive requires implementation as of January 1, 2024 for EU member states.88

The US tax on global intangible low-taxed income, or “GILTI,” was not changed to conform to Pillar Two in the most recent tax reconciliation bill, the IRA. With a split-party US Congress, it is unlikely there will be bipartisan support for international tax reform or notable changes to the existing framework until at least the 2024 election cycle.

Multinational enterprises (MNEs) are the entities considered by Pillar Two. The framework’s Global Anti-Base Erosion Rules are in place to ensure MNEs pay at least a 15% tax rate in the jurisdictions in which they have operations. To be considered an entity within the scope of Pillar Two obligations, the MNEs must operate in at least two global jurisdictions and have a consolidated group revenue of at least US\$818 million in at least two of four fscal years immediately preceding the entry into force of the Pillar Two rules.89

The OECD has issued safe harbor guidance that may reduce the burden of Pillar Two in the initial years. In addition, there are certain exclusions to these rules, particularly as they relate to real estate investment vehicles (REIVs) and investment funds (IF), such as REITs and other funds that focus on investment in real estate. Subsidiaries of these entities may also be excluded if the REIV or IF owns at least 95% of the investment subsidiary.90 There are additional ownership thresholds and primary business activity designations that will difer from company to company and can impact qualifcation for these exclusions. Further guidance will likely be needed to help clarify the defnitions and determine the applicability of these provisions.

Actionable guidance to consider

Real estate tax leaders should assess eligibility and available opportunities for credits and incentives. These can help either ofset existing tax obligations or open doors into capital sources. New laws coming into play over the next 12 to 18 months can change how companies approach their planning for tax credits and incentives.

Know where you stand with global minimum tax requirements. Cross-border corporations should confrm their status as an exempt entity under Pillar Two, analyze potential safe harbors that may be available to defer immediate impacts, and prepare for any impending 15% minimum tax obligation that may be due. Uncertainty specifcally around how real estate investment vehicles are treated could lead to unexpected tax savings or burdens.

Evolving hybrid work and transforming operations

Hybrid work may not be one-size-fts-all

he past few years have contributed to the idea that hybrid work opportunities are likely here to stay. But the meaning of “hybrid work” continues to evolve. Companies should provide direction to employees on where to complete their

work and build the right infrastructure to support a hybrid environment as employees are trying to balance working at two diferent locations with diferent schedules and demands. This delicate balance can be taxing, and 64% of workers globally say they have considered, or would consider, looking for a new job if their employer wanted them back in the ofce full time.91 This age of hybrid work should be defned by fexibility and transparency. Decisions on days in and rule-setting from the top should evolve. This includes involving employee opinions on how many or which days are needed to connect in ofce or allocated to deep work at home. Coming into the ofce for a day flled with conference calls that could be done remotely could foster undesirable frustration among employees.

Employees may be more receptive to hybrid decision-making if they have an open line of communication and measurable data to support hybrid efectiveness. A recent study by Deloitte outlined several metrics organizations can consider while developing their hybrid strategies, equally balancing work productivity and talent development. These measures include ofce space utilization, meeting quality, use of technology for communication, peer learning, team participation in decision-making and long-term planning, and interconnectivity between departments or functional areas, among others.92

INDUSTRY LEADER PERSPECTIVES: HEITMAN’S MARY LUDGIN ON LEADING AN ORGANIZATION IN TODAY’S WORKPLACE

“We try to hire the smartest, most intellectually curious people possible and then give them room to run. Long before working from home, that included recognizing that some members of my team were really beter if they were allowed to wander in at 9:30, and they would still be there at 8:30 at night. I just needed to give them the room in which they could be—what’s the cliché?—their best selves. I’ve always tried to create a space in which people can do their best work. We have the pleasure of each other’s company in trying to think through complicated circumstances.”93

—Mary Ludgin, director of global investment research, Heitman

From Deloite’s Within Reach podcast series

While there is no blueprint for where work gets done, a good chance at a solution could require a mix clearly outlining hybrid worker contributions and sense of belonging within an organization’s long-term performance, and when indicated, physically evolving the workplace to better refect the tasks that are best handled together, in-person. Studies show that the primary purpose for a physical ofce is collaboration, so workplace design should foster connectivity.94 The physical, virtual, or hybrid workplace has become a mere input to executing the work, and organizations that prioritize what employees need to get the work done will likely be better equipped to achieve the desired results.

In our survey, real estate executives identifed fexible workday schedules (43%) and regular opportunities to work remotely (40%) as their top actions for talent acquisition and retention (fgure 8). These priorities have shifted from the prior year, where respondents’ top three actions to attract and retain talent were increased focus on diversity, equity, and inclusion (41%); accelerated career growth opportunities (39%); and remote work oferings and increased workplace automation (38%). Regular opportunities to work remotely retained a top spot year over year. But interestingly, fexible work schedules, accelerated upskilling, and a commitment to climate change initiatives garnered the largest increase in responses compared to the prior year. This shift in priorities refects organizations’ responsiveness to employees’ feedback on the need for fexibility and transparency, as well as a desire to train existing employees in new areas as frms look to modernize technology and outsource certain functions. Conversely, workplace redesign, recognition and rewards, and workplace automation dropped in popularity as compared to the prior year. These initiatives likely require more capital outlay, refecting organizations’ desire to mitigate spending with a particular focus on reductions in talent-related expenses and costs for ofce space.

Leveraging outsource capabilities for enhanced efciency

Drivers of change

Organizations seeking to evolve the talent experience and physical workplace are also motivated to transform operations. Talent shortages and lack of agile infrastructure have been identifed as some of the biggest barriers to success.95 Though from our survey, those priorities may difer across the size and scale of the organization. A majority of respondents from large real estate organizations (57%) still expect to increase headcount in 2024. This is a marked change from the prior year, where only 29% of large organizations expected to increase headcount in 2023. However, the inverse is true for smaller organizations: Only 45% of respondents expect to increase headcount in 2024, down from 53% in 2023. Given the lukewarm revenue projections as noted earlier and respondent expectations for worsening real estate fundamentals overall, organizations should consider many options for transformation and avoid defaulting to standard cost-cutting measures like procurement or reducing headcount.96

INDUSTRY LEADER PERSPECTIVES: SEAFORTH LAND’S TYLER GOODWIN ON “EARNING THE COMMUTE”

“As employers continue to vie for talent amidst this hybrid future, they need to establish a workplace environment that ‘earns the commute’ of their employees into the ofce. A cubicle farm in a glass box won’t do it… It needs to incorporate more breakout space and meeting rooms, and desks need to be comfortable and available. Hot desking can actually have a negative impact on earning that commute. Peak days ofen result in lack of seating, which can massively undermine the greater objective frms are trying to achieve [in geting people back in the ofce]. Given ofce accommodation is typically between 5% and 10% of talent costs, cuting back on space at the expense of experience and dedicated workspace feels a lot like stepping over a dollar for the sake of a dime.”97

—Tyler Goodwin, chief executive ofcer, Seaforth Land

To that end, most of our respondents (61%) are considering outsourcing certain operational capabilities over the next 12 to 18 months. Their primary goals are gaining technological capabilities and streamlining processes (42%), adding agility and resilience to their operations (39%), and accessing integrated oferings across business lines (38%). While some could perceive outsourcing as a means to subtract headcount and replace it with thirdparty labor, real estate leaders seem to be pursuing an alternative route. According to our survey, those who plan to outsource operations are most likely to still add headcount, while those not outsourcing are most likely to reduce headcount. The former group appears to be doubling down on transformation, adding capabilities and resilience through outsourcing, as well as investing in new hires across diferentiated skill sets.

Real estate leaders are most likely to oer workplace flexibility options to a ract and retain talent

Which of the following actions is your company most likely to take over the next 12 to 18 months to attract and retain talent? 2023 . 2024

Note: Respondents could make multiple selections.

Source: The Deloie Center for Financial Services 2024 Real Estate Outlook Survey.

Labor supply shortages and elevated cost of operation have impacted property management functions. A few real estate companies have turned to leading-edge technologies with more proactive capabilities, such as automating rent collections, leasing, and tenant management.98 These initiatives help reduce the need for onsite resources and improve customer satisfaction by ofering real-time responsiveness. Firms may be leaning toward incorporating enterprise-level controls by centralizing operations in-house or partnering with third-party service providers. Many are shifting away from disjointed technologies deployed across diferent functional areas.

This is a part of a growing centralization and outsourcing pattern some residential frms have recently adopted:

In 2021, Equity Residential was able to generate US\$15 million in additional net operating income by integrating an AI-enabled property leasing and maintenance platform, which could handle 84% of inbound electronic leads and reduce approximately 7,500 labor hours per month. The REIT also anticipates adding US\$25 million to US\$30 million of additional net operating income over the next couple of years by leveraging technology and outsourcing repetitive tasks.99

Gables Residential entered into a third-party servicing agreement with AvalonBay Communities to help support back-ofce and administrative functions within the Gables operation. AvalonBay’s customer care center will service the entire Gables portfolio and allow Gables to better meet growing customer service demands. The mutually benefcial partnership also helps AvalonBay make continued investments into technologies, processes, and people that help service their own portfolio.100

Apartment, BTR, and SFR owners are also leveraging recruitment outsourcing to address hiring needs. This can be especially helpful when they’re expanding in new markets or for new development projects, when hiring the right talent within time constraints can be a critical diferentiating factor for success.101

What real estate frms can achieve

Real estate owners and operators are increasingly looking to deploy outsourcing or cosourcing models so that internal teams can focus on core service oferings, where they can gain a competitive advantage. Speed of delivery and intricacy can be a strategic diferentiator across real estate functions such as lease audits, valuations, and tax, as investors demand greater transparency and thorough preinvestment due diligence.102 As data volume and demand for granular information on asset performance increase, investors are coming to terms with the limitations of traditional spreadsheet-based models for fund accounting or valuation of investment.

INDUSTRY LEADER PERSPECTIVES: CBRE’S VIKRAM KOHLI ON ACCELERATING OPERATIONS TRANSFORMATION

“We want to take advantage of technology, automation, and machine learning and what’s happening with AI as a way to potentially skip a generation of ofshoring and outsourcing. We recently set up a centralized transformation ofce, comprised of several strategic efciency-focused functions, to accelerate how quickly we achieve greater operational efciencies and drive innovation through technology integration.”103

—Vikram Kohli, chief operating ofcer, CBRE Group

The top three functional areas most identifed by survey respondents for outsourcing over the next 12 to 18 months are property operations and management; analytics, fnancial planning, and analysis; and risk management and internal audit (fgure 9). Analytics, fnancial planning, and analysis notched the largest annual percentage increase, while tax outsourcing declined eight percentage points, dropping in ranking from fourth overall last year to ninth this year. Outsourcing these functions could allow real estate leaders to keep focused on creating, maintaining, and growing their competitive advantage in core functional areas such as customer relations, development, acquisitions, or leasing.

Actionable guidance to consider

Prioritize clarity, collaboration, and equity as part of a hybrid work strategy. Hybrid work is likely here to stay, and employees have grown to expect clear communication on when and where. Regardless of what balance of at-home or in-person work organizations take, leadership styles and employee support structures should be aligned with in-person, remote, or hybrid arrangements. Leaders should consider concepts like team-by-team back-to-ofce schedules for added fexibility or broader meeting space and desk availability to help ensure that opportunities for connection are being provided to team members.

Think about how the workplace could physically evolve to foster connection and collaboration among employees coming onsite. Build workspaces that spark casual conversation for those who are in-person; provide seamless videoconferencing capabilities for employees working virtually.

Evaluate how outsourcing capabilities could accelerate agility and scalability. Consider enterprise service oferings that allow for integration across business lines and build resilience. Leveraging a third-party alone may not be enough. Those parties should be coordinated with in-house capabilities to create a seamless fow of data and operations inside and outside the organization.

Figure 9

Respondents plan to leverage outsourcing resources to improve operational performance in functional areas

What functional areas are you most likely to consider outsourcing to improve operational performance over the next 12 to 18 months?

Enhancing real estate technology capabilities through speed and interconnectivity

he value of real estate has expanded; it now accounts for nearly two-thirds of real assets around the globe. But the technology supporting the industry has more or less remained the same.104 From our survey, 61% of global real estate owners

and investors are still dependent on legacy technology infrastructures (fgure 10). And while nearly half of these legacy users plan to make the jump toward modernization, successful implementation is often more complicated than clicking “update.” Estimates suggest that up to 73% of enterprise data across industries goes unused, so there are opportunities for leaders in the real estate industry to put that valuable information to better use.105

INDUSTRY LEADER PERSPECTIVES: SIMONPROPERTY GROUP’S BRIAN MCDADE ONINVESTING IN TECHNOLOGY TO GAIN ACOMPETITIVE EDGE

“There’s an evolution of our business model that’s occurring. We, like other leaders in their respective industries, are going to become a data company. We are going to fgure out how to monetize the plethora of data we have access to, whether it’s through AI integration or anything else. We are investing in technology at well above our historic rate to repay the tech debt that has built up. There is a competitive advantage that we’re going to have, given our size and scale.”106

—Brian McDade, chief fnancial ofcer, Simon Property Group

Acknowledging real estate industry technical debt

Most real estate frms still depend on established, albeit aging, legacy technologies that often serve a singular purpose for a particular task. On average, frms still use spreadsheets 60% of the time for reporting, 51% for property valuation and cash fow analysis, and 45% for budgeting and forecasting.107 These independent data processes can limit business units’ ability to communicate with each other, leading to redundancies and inefciencies that further slow the fow of data across an organization.

The costs associated with simply running and maintaining legacy technology, which were originally designed to save time or money, is known as technical debt. Estimates suggest that 10% to 20% of new product technologies are spent resolving existing technical debt. Some suggest the cost of technical debt can be as high as 60% of every dollar spent on information technology.108 However, the reality is that only 13% of real estate companies have access to real-time business intelligence and analytics, according to real estate services frm Jones Lang LaSalle.109

Challenges to more systematic digital adoption have likely come from the industry’s approach to generational diversity, outdated job roles, talent processes, and culture. From a Deloitte Center for Financial Services study, 45% of real estate employees are age 55 or older, compared to only 4% age 19–24. This lags behind the all-industry average of 24% and is double the banking and insurance average of 22% of employees who are 55 or older.110 Additionally, three out of every 10 new hires in real estate are baby boomers, and for every Generation Z hire, at least three baby boomers were recruited.111 Many of these new real estate jobs have targeted traditional skills like fnance, sales, or property management rather than advanced technical skills like data analytics, software development, or cloud computing—contributing to a widening skills demand gap.112

Challenging the status quo

Addressing data silos and the corresponding degraded speed of data fow across the organization should be mission critical in 2024. Especially now, as frms shore up balance sheets to protect against more fnancial instability, any additional lag created by core data ineffciencies could cause setbacks that could be avoided. Firms should be as agile and informed as ever, and being able to deploy real-time, data-driven decision-making can be a powerful tool to set leaders in the space apart from the rest of the pack.

Even more impactful might be when data sources can speak to one another. Combining information technology, operations, and customer data can help support decision-making at the highest levels.

Figure 10

More than half of real estate firms surveyed are still reliant on legacy technologies

Which of the following statements is most applicable to your institution’s core technology infrastructure?

Source: The Deloie Center for Financial Services 2024 Real Estate Outlook Survey.

Too much data also isn’t helpful, and it’s important to select the right data tools to improve efciency. It’s also important to fnd data sources that challenge the status quo rather than those that just validate existing thinking. Here is where emerging technologies can play a role.

When we asked our respondents about their interest and investment in emerging technologies, AI, a new choice this year, far and away outpaced other technologies in hard dollar commitments. Seventy-two percent of respondents say their organizations are either in piloting, early-stage implementing, or in full production with solutions enabled by AI (fgure 11). With the emergence of generative AI capabilities in early 2023, global real estate leaders appear to be interested in exploring its use cases for the industry. Common applications could include automation of property acquisition or disposition recommendations, leasing and tenant management, property management, due diligence, and market analytics, among others.

Digital twin technologies, virtual replicas of buildings that use real-time data from smart sensors to better track utilities usage, came in second among respondents with 67% in hard dollar commitments, followed by smart contracts, self-executing transaction protocols stored on the blockchain, at 63%. Last year’s hot button concept, the metaverse, saw some waning momentum; it still represents the largest share of respondents who simply have no interest in the capabilities at 21%. However, there was a 5% increase in respondents whose frms put a metaverse-targeted solution into production from last year.

Actionable guidance to consider

Do it now to compete for talent. New employees are seeking organizations with increasingly complex technology capabilities and integration so that they can hone their skill sets.113 Lagging technology capabilities could be a growing deterrent to attracting candidates into the real estate industry.

Reevaluate what is possible; data is changing faster than you think. See what other leaders or industry early adopters have done and follow their leads, even in other sectors or disciplines. Keeping up with the latest and greatest is often like hitting a moving target. Innovative ideas that you may have had a few years ago, but not acted on, may already be getting stale.

Establish a checks-and-balances technology decision-making process and expect more from the technology you choose. Do not settle for generic solutions for singular functions; that is what built up the monumental technical debt in the frst place. Use committees or buying teams across departments to help guide technology acquisition decisions.

Don’t be afraid of what’s out there. Consider emerging technologies as a legitimate means to an end rather than simply a passing fad. Explore the viability of use cases for your specifc needs across solutions powered by concepts such as AI, digital twins, or smart contracts.

Figure 11
Real estate firms have been slow to embrace emerging technologies

Notes: Percentages may not add up to 100% due to rounding. Artificial intelligence was not included in the 2023 survey. We consider firms at the piloting, early-stage implementation, and in-production stages as those commi‘ing hard dollars to these solutions.

Source: The Deloi‘e Center for Financial Services 2024 Real Estate Outlook Survey.

Building on a stronger foundation for the future of commercial real estate

D evelopments across the commercial real estate industry will likely be under the microscope for the remainder of 2023 and into 2024. How industry leaders choose to navigate the coming 12 to 18 months could be crucial in establishing a f +h 1

sturdy base of operations for the long term.

Recent changes to the real estate landscape could forever shape the trajectory of the industry. Some property sectors are poised to exhibit drastically diferent fundamentals than ever before. Sustainability considerations should be paramount through the entire life cycle of buildings, not only for environmental preservation but also for property value preservation. New and impending tax rules need to be navigated. Hybrid work is likely here to stay, and employers should adapt their workplaces to “earn” their employees’ commute. Efciencies gained through operations and technology transformation can transform the industry. Leaders that treat these industry shifts as new foundational realities could position their frms with the stable footing needed to build for the future.

Ibid.

Endnotes

Ira Kalish, Global economic outlook for the week of July 24, 2023, Deloitte Insights, July 24, 2023.
Sarah Borchersen-Keto, “Do smart buildings increase cybersecurity risks across a REIT’s portfolio?” NAREIT, June 14, 2021.
MSCI RCA debt metrics standardized download, data as of July 19, 2023.
Board of Governors of the Federal Reserve System, “Federal Reserve’s preliminary data on senior loan ofcer opinion survey on bank lending practices,” April 2023.
MSCI RCA debt metrics standardized download, data as of May 24, 2023.
MSCI RCA capital trends reports, data as of July 24, 2023.
MSCI RCA debt metrics standardized download, data as of February 2023.
Ibid.
Manus Clancy, “CMBS delinquency rate nears 4% in June 2023; ofce delinquencies increase again,” Trepp, June 30, 2023.
Rebecca Rockey, James Bohnaker, Rob Miller, and Kevin Thorpe, US macro outlook: mild recession ≠ pleasant, Cushman & Wakefeld, March 2023.
MSCI real capital analytics, trendtracker data, accessed May 30, 2023.
Jones Lang LaSalle (JLL), Global real estate perspective August 2023, accessed August 25, 2023.
MSCI real capital analytics, global volume standardized download, accessed May 30, 2023.
JLL, Global real estate perspective.
Charlotte D’Souza, “European transaction volume slides to 11-year low,” PERE News, April 28, 2023.
Konrad Putzier, “As Americans work from home, Europeans and Asians head back to the ofce,” Wall Street Journal, February 28, 2023.
Ibid.
CBRE, Spring 2023 US ofce occupier sentiment survey, May 18, 2023.
Miriam Hall, “Moody’s Analytics: Eighty-four percent of ofce loans maturing could have trouble refnancing,” Bisnow, May 19, 2023.
Rockey, Bohnaker, Miller, and Thorpe, US macro outlook.
Kevin Richards, Tim Coy, and Parul Bhargava, Property conversions: Will today’s ofce vacancies become tomorrow’s WFH locations, Deloitte Insights, July 27, 2023.
University of Michigan, “Survey of consumers,” June 30, 2023.
Stephen Rogers, “ Global State of the Consumer Tracker,” Deloitte, May 29, 2023.
Linda Moss, “US store openings surpass closings this Year, despite high-profle liquidations,” CoStar News, August 3, 2023.
JLL, Global real estate perspective.
Ciara Long, “Bankruptcies, bank failures haven’t dented retail real estate’s recovery just yet,” Bisnow, May 8, 2023.
Ibid.
Nick Handrinos and Lupine Skelly, 2023 retail industry outlook,

Deloitte, February 2023.

Ibid.
Rockey, Bohnaker, Miller, and Thorpe, US macro outlook.
JLL, Global real estate perspective.
Tim Coy and John D’Angelo, “The impacts of economic uncertainty, supply chain disruptions, and e-commerce trends on industrial real estate today and in the future,” Pension Real Estate Association Quarterly, Fall 2022.
Timothy Aeppel, Ben Klayman, and Nichola Groom, “Insight: US manufacturing boom has a real estate problem,” Reuters, April 13, 2023.
Ibid.
Ibid.
Avison Young, “Q2 2023 US multifamily market overview,” accessed August 25, 2023.
Editorial, “The rich world’s housing crunch is far from over,” Economist, April 02, 2023.
Ibid.
Ibid.
World Economic Forum, “Here are fve policies to help solve the global housing crisis,” March 24, 2022.
Emily Badger, “American cities have a conversion problem, and it’s not just ofces,” New York Times, July 1, 2023.
Daniel Bachman, United States economic forecast, Q2 2023, Deloitte Insights, June 15, 2023.
Robin Rothstein and Chris Jennings, “Housing market predictions for 2023: When will home prices be afordable again?” Forbes Advisor, accessed August 24, 2023.
JLL, Global real estate perspective.
Eileen Crowley, Michael Daher, Steve Rogers, Matt Soderberg, Bryan Terry, Peter Caputo, and Maggie Rauch, 2023 travel industry outlook, Deloitte, accessed August 25, 2023.
Ibid.
Ibid.
Suzanne Rowan Kelleher, “Business travel will never bounce back to pre-pandemic levels, studies say,” Forbes, April 24, 2023.
Peter Caputo, Matt Soderberg, Eileen Crowley, Michael Daher, Maggie Rauch, Bryan Terry, Scott A. Rosenberger, and Upasana Naik, Navigating toward a new normal: 2023 Deloitte corporate travel study, Deloitte Insights, April 10, 2023.
Ibid.
Cushman & Wakefeld, 2023 Global Data Center Market Comparison accessed August 25, 2023.
Ibid.
Richard Berger, “US single-family rent growth continues to slow while BTR demand fourishes,” Globest.com, June 21, 2023.
Ibid.
JLL, Single family rental, June 2023.
World Health Organization, “Ageing and health,” October 1, 2022.
Green Street, “Green Street’s US sector outlooks examine commercial real estate during capital markets upheaval,” press release, February 2, 2023.
CBRE, 2023 US life sciences outlook, April 2023. 60. Ibid.
Vicky Levy, “2023 global life sciences outlook: COVID, new laws, higher interest rates are shaping companies,” Deloitte, April 18, 2023.
Deloitte Center for Financial Services executive interviews conducted between May 25, 2023, and June 29, 2023.
CBRE, Green is good: The enduring rent premium of LEED certifed US ofce buildings, October 2022.
Deloitte Center for Financial Services executive interviews conducted between May 25, 2023, and June 29, 2023.
Emma Swinnerton, Sukhdeep Dhillon, and Nigel Almond, “Obsolescence= Opportunity: The next evolution of ofce space in Europe” Cushman & Wakefeld.
JLL, “Cities using more regulation to reach net-zero targets through decarbonization of buildings,” press release, May 23, 2022.
Martin Kelly, “Net-zero goal for new Sydney CBD buildings from 2026,” Financial Review, May 24, 2021.
Building Transparency, “Embodied Carbon in Construction Calculator FAQ,” accessed July 31, 2023.
Elliott Wood, “The Structural Carbon Tool version 2,” Institution of Structural Engineers, March 31, 2022.
Mary Read, “Vancouver’s bold building plan for emissions reductions,” Green Building Canada, May 31, 2022.
Bellona Europe, “European parliament takes frst encouraging steps toward regulating embodied carbon,” February 8, 2023.
UK Parliament, “Carbon Emissions (Buildings) Bill,” December 12, 2022.
Architecture 2030, “Why the built environment?” accessed July 31, 2023.
Transparency Market Research, “Construction waste market,” accessed August 25, 2023.
Peter Fabris, “Global construction waste to almost double by 2025” Building Design + Construction, March 22, 2018.
James Gaines, “The cities built to be reusable,” BBC, February 8, 2023.
BXP, 2022 BXP ESG report, accessed August 28, 2023.
Kilroy Realty, 2022 sustainability report, accessed August 28, 2023.
Deloitte, “Globally consistent ESG reporting,” accessed August 28, 2023.
Deloitte, “#DeloitteESGNow—frequently asked questions about EU Corporate Sustainability Reporting directive,” Heads Up 30, no. 15 (August 2023).
Chiara Delmastro, “Buildings – Analysis - IEA.” International Energy Agency, September 2022.
Ibid.
Ibid.
European Commissions, “The Green Deal Industrial Plan,” accessed August 28, 2023.
Organisation for Economic Co-operation and Development (OECD), “Tax challenges arising from the digitalization of the economy—Global Anti-Base Erosion model rules (Pillar two),” accessed August 28, 2023.
OECD, “International tax reform: OECD releases technical guidance for implementation of the global minimum tax,” February 2, 2023.
OECD, Tax challenges arising from the digitalization of the

economy—administrative guidance on the Global Anti-Base Erosion model rules (Pillar two), July 2023, accessed August 28, 2023.

Tim Shaw, “EU agrees to implement global minimum tax,” Thomas Reuters: Tax & Accounting, December 20, 2022.
Tan Chia Woon and Ashley Lim, Deloitte TaxMax: Top crossborder tax issues to watch out, Deloitte, March 22, 2023, p. 5. 90. Ibid.
Steve Hatfeld, Tara Mahoutchian, Nate Paynter, Nic Scoble-Williams, John Forsythe, Shannon Poynton, Martin Kamen, Lauren Kirby, Michael Grifths, and Yves Van Durme, Activating the future of workplace, Deloitte Insights, January 9, 2023.
Deloitte, “Rethinking the workplace: Hybrid work in the future of work,” accessed August 28, 2023.
Deloitte Center for Financial Services executive interviews conducted between May 25, 2023, and June 29, 2023.
Hatfeld, Mahoutchian, Paynter, Scoble-Williams, Forsythe, Poynton, Kamen, Kirby, Grifths, and Van Durme, Activating the future of workplace.
Mauricio Garza, Raed Masoud, Austin Buit, Faisal Shaikh, and Abhijit Chakraverty, 2023 MarginPlus Survey: Transformation through disruption, Deloitte, March 2023.
Ibid.
Deloitte Center for Financial Services executive interviews conducted between May 25, 2023, and June 29, 2023.
Paul Bergeron, “Apartment managers pivot to centralized leasing technology,” Globest.com, November 24, 2021.
Equity Residential, 2021 annual report, accessed August 28, 2023.
Leslie Shaver, “AvalonBay to provide Gables with back-ofce support services,” Multifamily Dive, May 3, 2023.
Paul Bergeron, “Build-to-rent, single-family rentals uses recruitment process outsourcing as a way to scale hiring,” Globest.com, October 20, 2022.
PERE News, “Is outsourcing worth it? Alter Domus on what managers need to consider,” September 3, 2018.
Deloitte Center for Financial Services executive interviews conducted between May 25, 2023, and June 29, 2023.
Adrienne Sanders Kaye, “Proptech and real estate disruption: Unlocking innovation,” Columbia Business School, October 27, 2022.
Mike Gualtieri, “Hadoop is data’s darling for a reason,” Forrester, January 21, 2016.
Deloitte Center for Financial Services executive interviews conducted between May 25, 2023, and June 29, 2023.
Altus Group, CRE innovation report, 2019.
Ken Knapton, “Measuring and managing technical debt,” Forbes, August 10, 2022.
JLL, “How real estate is raising its data game,” May 30, 2023.
Jim Berry and John D’Angelo, “Preparing for the future of commercial real estate,” Deloitte, September 14, 2020.
Ibid.
Ibid.
Steve Hatfeld, Tara Mahoutchian, Nate Paynter, Nic Scoble-Williams, John Forsythe, Shannon Poynton, Martin Kamen, Lauren Kirby, Kraig Eaton, and Yves Van Durme, Powering human impact with technology, Deloitte Insights, January 9, 2023.

About the authors

Jefrey Smith

jefsmith@deloite.com

Jefrey Smith is Deloitte’s US Real Estate leader with nearly 30 years of audit and accounting experience. Throughout his career, he has worked with public and private owners, developers, sponsors, managers, and lenders in nearly all sectors of the real estate and hospitality industries.

Kathy Feucht

kfeucht@deloite.com

Kathy Feucht is Deloitte’s Global Real Estate sector leader and an audit partner based in the Milwaukee ofce with more than 20 years of experience. She serves as lead client service partner for both public and private clients in the Chicago and Milwaukee marketplaces, with a focus on the real state and hospitality sectors.

Renea Burns

reburns@deloite.com

Renea Burns is Deloitte’s US Real Estate eminence leader and an audit partner based in the Houston ofce with 20 years of public and industry accounting experience. Her clients include public and privately owned companies, including real estate investment trusts, owners, operators, developers, as well as investors in mortgage or mezzanine loans secured by real estate.

Tim Coy

ticoy@deloite.com

Tim Coy is a research leader of commercial real estate at the Deloitte Center for Financial Services. He is responsible for the development of market-leading insights and thought leadership initiatives in support of Deloitte’s Real Estate industry practice.

Acknowledgments

The authors wish to acknowledge Parul Bhargava, Jessica Domnitz, and Gaurashi Sawant for their extensive contributions to the development of this report. They would also like to thank their colleagues Jamie Baker, Rebecca Chapman, Tony Cocuzzo, Karen Cronin, John D’Angelo, Fhernanda Del Toro Arroyo, Margaret Doyle, Peter Firth, Nathan Florio, Siobhan Godley, Lize Grifths, David Hagger, Rosie Haigh, Lynn Kawaminami, Jonathan Keith, Philip Law, Luis Lira, Marco Macagnano, Saurabh Mahajan, Michael Mueller, Catherine Nguyen, Robin Ofutt, Adam Regelbrugge, Lauren Pesa, Kevin Richards, Brian Ruben, Alberto Valls, and Nobuyuki Yamada for their insights and guidance.

About the Deloitte Center for Financial Services

The Deloitte Center for Financial Services, which supports the organization’s US Financial Services practice, provides insight and research to assist senior-level decision-makers within banks, capital markets frms, investment managers, insurance carriers, and real estate organizations. The center is stafed by a group of professionals with a wide array of in-depth industry experiences as well as cutting-edge research and analytical skills. Through our research, roundtables, and other forms of engagement, we seek to be a trusted source for relevant, timely, and reliable insights. Read recent publications and learn more about the center on Deloitte.com. For weekly actionable insights on key issues for the fnancial services industry, check out the Deloitte Center for Financial Services’ QuickLook article series.

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Industry leadership

Jefrey J. Smith

US Real Estate leader | Partner | Deloite & Touche LLP +1 617 437 2804 | jefsmith@deloite.com

Jef Smith is Deloitte’s US Real Estate leader with nearly 30 years of audit and accounting experience.

Kathy Feucht

Global Real Estate leader | Partner | Deloite & Touche LLP +1 414 977 2662 | kfeucht@deloite.com

Kathy Feucht is Deloitte’s Global Real Estate sector leader and an audit partner based in the Milwaukee ofce.

Renea Burns

US Real Estate eminence leader | Partner | Deloite & Touche LLP +1 713 982 4159 | reburns@deloite.com

Renea Burns is Deloitte’s US Real Estate eminence leader and an audit partner based in the Houston Ofce.

The Deloite Center for Financial Services

Jim Eckenrode

Managing director | Deloite Center for Financial Services | Deloite Services LP +1 617 585 4877 | jeckenrode@deloite.com

Jim Eckenrode is a managing director at the Deloitte Center for Financial Services.

Tim Coy

Research manager | Deloite Center for Financial Services | Deloite Services LP +1 332 323 4896 | ticoy@deloite.com

Tim Coy is a research leader of commercial real estate at the Deloitte Center for Financial Services.

Contributors

Editorial: Karen Edelman, Hannah Bachman, Pubali Dey, and Debashree Mandal

Creative: Jim Slaton, Molly Piersol, Harry Wedel, and Pooja N. Lnu

Deployment: Abhijit Sahu

Cover artwork: Jim Slaton

Deloitte.

Published in collaboration with Deloite Insights.

About this publication

This publication contains general information only, and none of Deloite Touche Tohmatsu Limited, its member frms, or its and their afliates are, by means of this publication, rendering accounting, business, fnancial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may afect your fnances or your business. Before making any decision or taking any action that may afect your fnances or your business, you should consult a qualifed professional adviser. None of Deloite Touche Tohmatsu Limited, its member frms, or its and their respective afliates shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

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KEY TAKEAWAYS

Geting back on solid ground

Concerns about a slowdown further weigh on industry revenues and spending

METHODOLOGY

Shifing structural expectations across the property markets

Figure 3A

More respondents expect fundamentals to worsen than in all prior Real Estate Outlook surveys

Ofce

How we got here

A new foundation

Retail

How we got here

A new foundation

Industrial

How we got here

A new foundation

Residential

How we got here

A new foundation

Hotel

How we got here

A new foundation

Alternatives: Digital economy, specialty housing, and life sciences

Digital economy

Single-family rentals/build-to-rent

Senior housing

Life sciences

Actionable guidance to consider

Conservative

Proactive

INDUSTRY LEADER PERSPECTIVES: HOWARD HUGHES’S JOHN SAXON ON THE IMPORTANCE OF LOCATION AND THE MIXED-USE ENVIRONMENT

Constructing a sustainability strategy to transition to a low-carbon future

INDUSTRY LEADER PERSPECTIVES: BXP’S MIKE LABELLE ON SEAMLESSLY INCORPORATING SUSTAINABILITY INTO PORTFOLIO STRATEGY

Sustainability in building operations

Whole-life carbon assessments should become the standard

Many real estate frms lack internal controls they need for compliance

Actionable guidance to consider

Figure 6

Leaders are considering a wide array of sustainability initiatives for the future of their buildings

Deepening tax comprehension to help strengthen the botom line

Kicking of the global minimum tax

What’s in store

Real estate CFOs are most concerned about losing tax allowances or benefits

Actionable guidance to consider

Evolving hybrid work and transforming operations

Hybrid work may not be one-size-fts-all

INDUSTRY LEADER PERSPECTIVES: HEITMAN’S MARY LUDGIN ON LEADING AN ORGANIZATION IN TODAY’S WORKPLACE

Leveraging outsource capabilities for enhanced efciency

Drivers of change

INDUSTRY LEADER PERSPECTIVES: SEAFORTH LAND’S TYLER GOODWIN ON “EARNING THE COMMUTE”

Real estate leaders are most likely to oer workplace flexibility options to a ract and retain talent

What real estate frms can achieve

INDUSTRY LEADER PERSPECTIVES: CBRE’S VIKRAM KOHLI ON ACCELERATING OPERATIONS TRANSFORMATION

Actionable guidance to consider

Figure 9

Enhancing real estate technology capabilities through speed and interconnectivity

INDUSTRY LEADER PERSPECTIVES: SIMONPROPERTY GROUP’S BRIAN MCDADE ONINVESTING IN TECHNOLOGY TO GAIN ACOMPETITIVE EDGE

Acknowledging real estate industry technical debt

Challenging the status quo

Figure 10

Actionable guidance to consider

Building on a stronger foundation for the future of commercial real estate

Endnotes

About the authors

Jefrey Smith

Kathy Feucht

kfeucht@deloite.com

Renea Burns

reburns@deloite.com

Tim Coy

ticoy@deloite.com

Acknowledgments

About the Deloitte Center for Financial Services

Connect

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Real estate leaders are most likely to oer workplace flexibility options to a ract and retain talent

2024 commercial real estate outlook: Finding terra firma