Source: Best Lawyers —
The last few years have seen significant changes in the business world: the COVID-19 pandemic, rising inflation and interest rates, work-from-home trends, supply chain problems, the rise of ESG in corporate boardrooms and more. To the outside world, real estate appears immune from these current developments. For those involved in real estate development, however, the impacts are very real.
The Impact of the Pandemic and Inflation on Real Estate Projects
Real estate markets have been greatly affected by the COVID-19 pandemic and the resulting economic impacts of inflation and supply chain disruption. The shift to a “work from home” mentality has adversely impacted traditional office markets. Fewer people working in the office has resulted in a “flight to quality”—those that remain in the office want nicer surroundings and better amenities. The older class C/D office buildings are slowly emptying and becoming ripe for redevelopment, often being converted to residential spaces.
The uptick in “shop-from-home” has also had a significant impact on warehouse and industrial real estate. The desire for last mile delivery has caused warehouses to pop up everywhere—who hasn’t seen a new Amazon warehouse go up in the last few years? That warehouse expansion has tightened the market for industrial and manufacturing space.
Affecting all real estate markets, however, are inflation and supply chain disruption. The most obvious impact of inflation on real estate markets is the rise in interest rates. Rising interest rates mean an increase in the cost of capital and a resulting increase in rental rates. Compounding the increased cost of capital is the impact of supply chain disruption. The cost of a new build project is substantially higher and more unpredictable than it was a few years ago. With the uncertainty in the cost and supply of materials needed to build a new project, construction contractors are hesitant to take on any risk in contracts. A few short years ago, a contractor might eagerly undertake a fixed fee project with per-diem penalties for delayed delivery; now, however, with the constantly rising cost of goods and the uncertainty in the supply chain, contractors are passing those risks back to the owner. Consequently, real estate development projects are costlier and more uncertain.
