Coping with inflation and interest rates

Forging ahead amid inflation, high interest rates

How CRE developers keep projects moving despite inflation and interest rates

If today’s economic climate has you feeling cautious, you’re certainly not alone. Between higher interest rates and lingering inflation, commercial real estate developers are facing some very real challenges and searching for practical solutions to keep their commercial real estate ventures moving forward. Look to the horizon, and it’s easy to see commercial real estate development is continuing in the Greater La Crosse, Wisconsin, area, the 7 Rivers Region and Rochester, Minnesota, despite these economic pressures.

Of course, pressures on the industry are multifactorial, and inflation and interest rates impact several factors that contribute to the commercial real estate environment. There’s an ongoing labor shortage, for one, expanded capitalization rates, changes to financing costs, and shifting expectations for investment returns. The squeeze, it seems, is coming from several angles.

So, what’s the secret? How are some developers keeping their projects moving amid these challenging headwinds? Let’s take a closer look.

How commercial developers are navigating the economic climate

Here are some key ways commercial developers are navigating these challenges and successfully keeping their projects on track.

  1. They’re keeping client needs in mind.

 Competition to attract tenants is fierce. Perhaps now more than ever, it’s essential to know your audience. Successful developers are listening to the needs of their target markets, and that’s key. Why? Because during the many shifts we’re experiencing in the CRE space, the rest of the world is shifting as well. Hybrid work, the changing nature of sales, and demand for mixed-use developments require different solutions than needed ten or even five years ago. Space design needs are different. Innovation from a service standpoint is a must — but developers also would do well to think about innovations that heal the pain points of their tenants, end-users, or target market. While commercial properties enjoyed robust demand for many years, now the most successful developers will focus on creating more than just a physical space; they’ll create solutions.

Collaborating with employers who better understand how their workforce operates can empower you and your design and build team to develop innovative designs that answer the need for both collective and individual workspaces. This may include digital solutions, hybrid work technology, omnichannel fulfillment innovations, and even smart parking solutions. More, by forecasting how tenants will want to use spaces in five years or more, you can co-create with your design and build team an ecosystem of retailers, residential tenants, and office space clients who will have a symbiotic relationship. The result: lasting appeal for your commercial real estate development and innovation that can bolster commercial rents.

  1. They’re exploring sustainability and other operational and cost efficiencies.

Efficiencies provide a valuable pressure relief valve for projects, so it’s essential to leverage every possible advantage when the market is uncertain. Value engineering will ferret out front-end cost efficiencies, and a lifecycle cost analysis can help you make informed decisions about the best short- and longer-term strategies for controlling costs throughout the project lifecycle.

Additionally, controlling input costs like labor and materials and managing revenues to balance inflationary pressures are key strategies to keep in mind. Some owners are even looking at renegotiating utilities contracts for their properties, including for energy or maintenance. In addition, there’s growing interest in sustainability solutions that go beyond what’s required. Some solutions can decrease operations costs and/or serve as a market differentiator to attract tenants who value climate solutions — an important factor to consider in this competitive market.

While maintaining a good credit rating and securing low-cost capital are always essential strategies, owners may also want to maintain financial agility and a willingness to consider refinancing opportunities when it is worthwhile.

Collaborating with experts who have access to the technology, data and analytics that can identify and demystify these opportunities is key. Your design and build partners can work with you to identify possible efficiencies for your commercial real estate project.

  1. They’re harnessing opportunities for underutilized parts of their portfolio.

Some business needs that exist today weren’t on our radar ten years ago. For developers with vacant or underutilized commercial space, there may be opportunities to capitalize on these emerging needs. Among them: ghost kitchens, which cook restaurant food but maintain a lean operation geared toward delivery. Additional space is also in demand for multifamily housing and senior living, so places like schools, office buildings and other large real estate footprints can find new life in our changing marketplace.

Looking at the emerging commercial real estate realities

Uncertainty in the commercial real estate sector is an ongoing consideration, but there are reasons to remain positive amid this market instability. Analysts believe interest rate increases may be tapering off in 2023. And inflation has shown signs of slowing, which could have ripple effects that alleviate pressures on mortgage rates, construction costs and operations expenses.

While it’s always important to make informed choices about your commercial real estate portfolio, it’s also helpful to work with a skilled design-build team that understands these economic pressures. With the design and build model of project delivery, your project team works as a single entity, providing unparalleled collaboration and solutions that can help you weather the economic uncertainty, until the market finds its equilibrium again.