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Real estate services CEOs chime in on key industry trends

In an EY survey, CEOs from commercial real estate companies discussed challenges including office distress, ESG and GenAI implementation.


In brief
  • CEOs of some of the largest commercial real estate service firms discussed challenges and opportunities within a dynamic market.
  • Among the topics, leaders discussed office distress, hiring and retaining talent, and the impact GenAI technology will have on the industry.
  • A weakened demand for office space has put pressure on CRE leaders, with many believing that the market will not improve for some time.

The commercial real estate (CRE) services industry is comprised of multidisciplinary platforms that provide brokerage, capital markets, property and facilities management, appraisal and other services to real estate owners. Today, CEOs of the largest CRE services companies are juggling a number of concerns. Since COVID-19, leaders have been forced to reassess their business models due to a tight labor market, heightened demand for environmental, social and governance (ESG) reporting, and mass changes to how we all work on a daily basis.

To gain a better understanding of how CRE service companies are handling a rapidly changing work environment, Ernst & Young LLP surveyed the CEOs of the largest CRE services companies globally to assess sentiment toward a variety of topics. We specifically inquired about the current economy, the rapid advancement of technology, and a growing Generation Z (Gen Z) workforce, among other topics.

 

A struggling office market

One area of top concern to survey respondents is a possible economic downturn, with the office asset class at the center of the distress conversation. With more adopting hybrid work policies, demand for office space is softening, resulting in higher vacancy rates and higher volumes of sublease space.

 

According to the EY 2023 Future of Workplace Index survey, 67% of companies are using a hybrid workplace strategy for their employees. The shrunken demand for leased office space has resulted in declining property valuations and associated demand for property management services.

 

Within our CEO survey, the overwhelming majority of respondents feel that the office market will continue to be strained over the next three to five years. One CEO noted: “It will get worse for a while until some of the stock goes away and employers regain the power to require higher office attendance.”

 

Many feel older, under-amenitized offices in need of capital upgrades will fail to keep up with newer, more amenity-centered and sustainably constructed office space. When asked about the former, about 90% of respondents indicated that under-invested offices will need to be carefully evaluated for highest and best use in the current environment.

 

“Class B and C building (depending on their location) will most likely need to be repositioned,” said one of the polled leaders, while another noted: “Redevelopment and change of use opportunities —— but the asset class is too big to allow every unit to be repositioned — therefore a material portion of obsolete and derelict office is inevitable.”

 

Adoption of GenAI technology

The rapid growth and advancement of technology, particularly artificial intelligence (AI), has become a strategic priority and competitive differentiator for CRE services companies. Some of the CEOs polled are evaluating emerging technologies to assess which platforms “bring efficiencies to our business and evaluating the return on investment (ROI) from implementation.”

 

Other executives have already implemented technology into their business model as to utilize the “data tools to solve the needs of our clients.” Some examples of ways CRE companies are utilizing AI includes tracking sustainability, performing financial analysis and asset management support.

 

EY believes generative AI (GenAI) has a role to play in commercial real estate, including creating opportunities for greater efficiency in property operations, investor relations and asset management; in the EY survey, approximately 60% of the CEOs polled agreed, adding they are already using GenAI in a number of existing business processes, including report writings, lease abstracts and data analytics. Most of the remaining respondents are unsure on GenAI and are waiting “carefully” to see the impact of AI on the industry.

 

60% of CEOs polled believe GenAI has a role to play in commercial real estate.

A key concern surrounding GenAI is the impact of the technology on replacement of the existing CRE services workforce, notably with job functions such as administrative support, legal, IT and customer support. Our EY industry experts believe that any negative impact on jobs will likely be offset by the creation of new jobs and functions that do not exist today thanks to the rise of the new technology.

 

However, many of the CRE services CEOs polled have mixed thoughts. Some believe that the “industry will not allow it as the human factor of directing transactions” and that jobs will not be replaced “in the foreseeable future.” Others say, “I think it may replace and/or augment many other functions in the near term, i.e. financial analysis, accounting, contract drafting, marketing materials, etc.”

 

Strategies for attraction and retention of CRE talent

Battle for talent, both new skilled labor as well as retention of current employees, remains one of the top priorities for CRE services companies. CEOs surveyed reported a range of strategies to attract and retain real estate talent within this highly competitive environment.

 

Some of the largest challenges discussed include flexibility (remote work vs. office), competitive compensation and finding the next generation of talent. One executive indicated the key to attracting and retaining talent is being agile, saying “The opportunity to get the best talent is flexibility, willingness to listen and change as necessary, fairness, and staying competitive.”

 

Other executives cite the need for new employees to train and build connection with co-workers in person. “The development of young staff is threatened by a culture of video meetings.” When it comes to specifically attracting the Gen Z workforce, the overwhelming response is a flexible work/life balance.

 

ESG and competing priorities in a challenging market

In recent years, ESG issues have become a growing priority for real estate executives, and investment in ESG may result in higher property values. In the current economic environment, with a heightened focus on costs, CRE services CEOs indicated they are balancing sustainability with other immediate and strategic priorities. About half of the respondents are not making ESG a top priority at this time.

 

One CEO noted: “It is a part of investment and operating practice, but we are not prioritizing this over generating strong investment returns.” However, a continued focus on sustainability from tenants, regulators and capital partners will affirm ESG as a macro influence within the CRE services sector in the years ahead.

 

Conclusion

In the years ahead, CRE services CEOs will balance a multitude of competing priorities, including technology and operational investments within their platforms and a dynamic evolution in the office market.

 

EY CRE Services approach

Our services and methodology are tailored to meet the specific needs, scale and sector context of each client, helping them to effectively select, implement and integrate technology into their environments, drive operational efficiency, make data-driven decisions, and continuously enhance their capabilities in managing people and physical spaces.

Summary 

The commercial real estate (CRE) industry is rapidly changing and being disrupted by a number of issues. CRE services industry leaders are having to reassess their business and investments. To get a better understanding of how CRE service companies are handling a rapidly changing work culture, we surveyed some of the top leadership in the industry.

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