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Commercial Real Estate – Indianapolis Business Journal

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At IBJ’s thought leadership roundtable, executives from Gray Capital and Renovia discuss market headwinds, Indy’s resilience, and how technology is improving everything from project management to rent.

How has the city’s commercial real estate and construction market changed since the beginning of the year?

Spencer Gray: The Indianapolis commercial real estate market shows strength in 2022 despite the headwinds of rising interest rates and economic uncertainty. The biggest difference this year compared to the 2021 frenzy is the return to somewhat ‘normal’ market conditions. Prices are still rising and speculative, but more closely aligned with fundamentals than last year.

Chris Hall: The direct impact of inflation on the construction market has shocked the industry as a whole. Indianapolis, like many other cities in the Midwest, is no exception. Procurement challenges will continue to ease over the remaining months of 2022, but will continue into 2023. Labor issues and inflation are thorny issues and will not change in the short term, but suppliers will continue to gain ground.

How do these market performances here differ from other cities and broader national trends?

Chris Hall: Every city and almost every industry faces some kind of labor problem. The Association of Builders and Contractors estimates that the industry will need to hire up to 650,000 workers to be able to meet the growing demand. Individually, Indianapolis has performed well in its midwestern peer market, a trend that will continue. Another major stumbling block in construction is the slow or no adoption of technology. I believe this could be a huge bright spot for Indianapolis given that the technology-infused landscape is already in place, making way for various strategic partnerships.

Spencer Gray: Indianapolis is much less volatile than many other US markets. Multifamily space is seeing strong demand and rental growth, but not the flood of new construction that many other markets have witnessed. It continues to attract foreign and international investment.

How is the ongoing labor shortage impacting your industry, and how are you responding to it?

Spencer Gray: Finding the right talent with qualified and available vendors continues to be a challenge. Prior to the pandemic, attracting and retaining experienced and reliable maintenance personnel was a challenge. Rising demand for construction across the board, from single-family home developments to infrastructure projects, means paying a premium for the right employees. .

Chris Hall: The construction industry is trying to overcome the challenges associated with attracting qualified candidates. There is an aging population leaving the industry, with approximately 21% of construction workers over the age of 55. Only 9% are under the age of 24. Millennials are not focused on careers in the construction industry, and the lack of diversity combined with the uncertainty surrounding immigration will continue to exacerbate the situation. At Renovia, we are excited about what the future holds when it comes to investing in our subcontractor workforce through professional services and industry-leading technology. We also use community engagement to help recruit talent.

What other market factors are influencing your industry?

Chris Hall: A McKinsey & Co. study found that 98% of construction projects are over budget, and 77% of those are severely delayed. Supply chain disruptions and procurement challenges began during the pandemic but linger through 2022. A lack of these materials has delayed the project.

Aside from supply chain disruptions, many construction companies are facing significant price increases from various manufacturers. As a result, some of the major retailers we work with are much more willing to adapt and use alternative products to meet their commitments. must adapt and provide valuable alternative solutions that continue to meet the customer’s long-term goals.

Spencer Gray: Interest rate and bond market volatility are among the most disruptive factors in commercial real estate. High interest rates and low cap rates (high prices) limit the amount of leverage available to prospective clients. This deleveraging reduces some of the risk in the market while pushing aside many buyers who have traditionally relied on higher levels of leverage. This has led to institutional investors becoming even bigger players in the acquisition space than they were before the pandemic.

What kind of bubble, if any, do you see forming in commercial real estate here or in the country?

Chris Hall: Given that prices have risen to unsustainable levels, the conditions are in place for what many call a bubble forming in commercial real estate. We will continue to see the long-term fallout of inflation scattered across markets, both locally and nationally. Add to that rising interest rates, the ongoing war in Europe with no end in sight, and the 2024 presidential election, and it’s hard to predict where the market is headed. This creates a riskier investment market for everyone.

Spencer Gray: While we don’t see concrete evidence of a bubble in the commercial real estate market today, there are certainly elements of a potential bubble. If commercial real estate investors speculate that inflation will remain significantly elevated for an extended period of time, they would expect a much-needed price adjustment to be required if growth instead slows dramatically. .

What about the housing market?

Chris Hall: Simply put, we haven’t built enough multifamily housing to accommodate the massive population growth we’ve experienced over the past decade. Gen Z is driving this demand, but many baby boomers are taking advantage of the real estate heat to sell their homes. The trend toward employee housing is likely to continue, with demand for flexible and convenient housing outweighing the responsibilities and hassles of home ownership. Outside of Indianapolis, many markets have limited housing supply, but new entrants are consistent. This has brought some positivity to what some might have labeled a “major slowdown looming”. But before COVID, as many as 24 buyers could have arrived at the table. Now, with the market tightening, that number has halved, if not less.

Spencer Gray: The multi-family market is currently benefiting from a lack of affordability for single-family homes due to rising interest rates, which has significantly increased monthly payments. Renting an apartment is now five times more affordable than buying a home compared to 2019. Many millennials who were on the market to buy their first home are no longer eligible, putting off the possibility of owning one in the near future. High barriers to purchase are not only pushing up rents for B- and A-class spaces, but also driving down vacancy rates. At the same time, there is weakness in market-priced labor force housing as inflationary pressures such as gas and food costs will plateau rent growth for low-income renters. Eviction and delinquency rates have also increased in this demographic, but are still below pre-pandemic levels.

How are emerging technologies changing your industry?

Spencer Gray: The apartment market has changed significantly in recent years with continued adoption of automated revenue management software that uses algorithms and daily market information to set new apartment rents daily based on current market prices and availability. . This technology has been around for some time and is now widely used throughout the multi-family housing industry. The result is a much more efficient market and rents that fluctuate significantly depending on the day prospective tenants view the property. In the past, property managers used market sense to set rents, usually on an annual or quarterly basis. The use of this technology has certainly contributed to his quadruple increase in rents seen in a typical year.

Chris Hall: The industry as a whole has been slow to adopt technology that can equip and connect multiple delivery points along the value chain. Companies are now turning to multiple of his SaaS-based platforms that connect people, processes and assets to enable more digitally enhanced insights into their daily operations. We are currently seeing small businesses looking for a platform that can connect their portfolios, creating a more manageable and seamless process related to capital expenditures, facility maintenance, and tenant improvement projects. is. Continued investment in data, analytics, and user-based experiences is essential if you want to innovate in the future.

Data collection apps, drones and artificial intelligence are all starting to become the norm in the construction industry as tablets and smartphones improve connectivity and communication between sites. Apart from the benefits provided to customers, companies are gathering more accurate and higher quality data to provide a real-time picture of changing costs and project timeframes to deliver to customers. Drones are becoming increasingly popular in today’s world given the accuracy and interactive data they can collect in the field. This is especially important for budget-constrained projects that are difficult to access and accurately estimate costs. On the other hand, the use of artificial intelligence has greatly helped our business create predictive indicators and cash projections that help drive growth.