What’s happening to commercial real estate in the USA?

The real estate sector in the US has seen its ups and downs since 2010. However, despite challenging economic conditions, many new construction projects are rolling forward. Over $115 billion worth of construction was done in 2022. The industrial and office sectors have received approximately $142 billion and $109 billion in investments. Still, there are many downward trends too. Whether it is changing workplace norms or government regulations, the changes are visible and present.

Ongoing trends in commercial real estate

Blurry future of office spaces

Office space is a major pillar in commercial real estate. However, increasing hybrid work and work-from-home are now established in the US. JLL says that US leasing volume fell to 38.5 million in 2023, a 9.8% decline since Q4 2020. Office spaces may be available at bargain prices, and rents could drop significantly with waning demand.

Industrial buildings going strong

The industrial building scenario remains strong. According to a CNN report, construction spending from manufacturing rose by about 71% in 2023. During an economic downturn, this is a positive sign. However, challenges await on the horizon and some industries may struggle to adapt to global changes. For example, the global cocoa shortage is causing concern in the bakery and confectionery industries. Cocoa product prices are currently higher, limiting sales, but a production shortage is on the horizon. This can lead to factory shutdowns and manufacturing construction may eventually be hit but that seems to be a projection for much later.

Retail sector is changing and evolving

The retail sector has significantly moved online, and as per Forbes, shoppers are relying on eCommerce to meet their shopping needs. Retail stores won’t (obviously) completely fade away. In fact, a CNN report suggests that foot traffic in top malls increased by 12% in 2022 as compared to 2019. This is still not comforting because, according to another report, there are only 700 malls in the United States today, compared to 2500 in the 1980s. The shopping trend is shifting, but the demand remains. People continue to lease retail space, and there is a clear need to accept a world that survives on both brick-and-mortar and eCommerce retail models.

Technological advancements

The advancement of technology is another factor driving changes in commercial real estate in the United States. An array of buzzwords dominate in the market, including proptech, energy management, and artificial intelligence. To remain competitive in the industry, real estate owners are focusing on consumer preferences, efficiency + sustainability, digital transformation, and other factors. There is a noticeable increase in solutions to manage carbon emissions, improved security, and the use of artificial intelligence to satisfy the occupants’ needs. Changing norms government norms and customer preferences will have a significant impact on real estate in the United States.

Not everyone is ready to follow ESG

The United States government issued new guidelines on January 1st of this year, increasing the focus on the country’s green building prospects. This requirement necessitates new construction practices and additions to meet the mandatory environmental guidelines and expectations. These include sustainable sites, water and energy efficiency, carbon footprints, and so on. All of these are significant changes that not every real estate owner will be willing to invest in. The extent to which this trend is implemented and accepted by the market will determine the future.

Looming threats in commercial real estate

Economic uncertainty, inflation, and dynamic market conditions are among the most serious threats to commercial real estate too. This may appear to be one side of the picture, but the government reports that disposable personal income increased by $67.6 billion, or approximately 0.3%, in January. Amidst this contradictory picture, the threat still remains clear: people are not taking out loans to start anything new. According to the report, loan standards are the tightest because demand for these loans has collapsed. All these changes could significantly impact commercial real estate and the insurance segment. Let’s take a look at how.

Impact on insurance needs

Insurance prices may increase

Rising climate events and the demand for better and safer buildings will have an impact on insurance prices. In states where the number of weather-related disasters is usually high, commercial building owners are facing the issue of high premiums. This is because the cost of renovating or restructuring the building is at an all-time high. If the buildings are in poor condition, the price may rise even higher. As the government imposes green building mandates, complexes that are not well equipped and lack a technological interface will face high insurance costs.

New demands for new policies

The commercial real estate segment is under pressure to make buildings safer and more secure to occupy, whether for office space or industrial manufacturing. Such new demands will necessitate the development of new policies to govern the use of solutions such as solar panels and water management, among others. The next step is to determine how to properly insure these buildings and how much repairs could cost for these new equipment and operational systems. Given that, insurance strategies necessitate new insurance systems with redesigned premiums and coverage. Commercial real estate in the US is changing rapidly. With so many new reforms, demands, work-from-home policies, and other industrial aspects, the industry is always in the headlines. Some states may face higher costs due to poor environmental conditions, but it would be interesting to see where the wind flows and gravitates towards. If you are a commercial real estate owner looking to have your building re-accessed for insurance purposes, contact us. We can assist you with risk management and portfolio analysis to provide excellent insurance advice. Get in touch