Forecasting an Uncertain 2023

Forecasting an Uncertain Tomorrow

Data Collection: Q4/2021 to Q1/2022

Methodology: Our Delphi approach to gathering insights from Tier One/Two industry executives on potential outcomes offers unprecedented accuracy. For an individual to excel in accurately forecasting two to three years requires a unique set of skills - the perfect mix, if you will! Characteristics like agility and intuitive learning coupled with innovation, reflectivity, and outward awareness make for high-performing visionaries who have an eye towards spotting emergent threats before they even appear on our radar. It's what we refer to as glimpsing 'ghosts' in the machine or catching those subtle blips at the edge of scope.

Executive Summary

• Rutherford International's CRE 2022/23 Industry PEST survey update highlights nine vital industry occupations which are top of mind for respondents.
• Developing a strategic plan around tomorrow's possibilities while facing present-day political, economic, social, and technological challenges will tax the focus and imagination of most executive leadership teams.
• Overall, respondents noted that talent quality (77%) and rising wages (66%) are part of their threat analysis for 2023.
• One form of incremental adjustment is a deliberate strategy to improve the talent quality within the company.
• The trending opinion in our 2022/23 PEST (Political, Economic, Social, Technological) analysis reveals that senior executives expect all levels of government to be active players in accessing Canada's credit markets while increasing personal and corporate taxes, development fees and regulations.
• Governments competing for capital within an inflationary market will impact asset repositioning and development proforma.
• Developers with shovel-ready projects and funds in place are making every effort to expedite their projects through 2022.
• In 2023, positions connected to preserving asset and portfolio values will dominate. Roles spanning credit risk analysis, appraisal expertise, property and asset management, and balancing investment portfolios
• The industry threats respondents anticipate for 2023 underscore the importance of acquiring talent with asset, loan and investment management expertise.

The very nature of an executive's job is to make decisions about committing resources to the possibilities of tomorrow.

Developing a strategic plan around tomorrow's possibilities while facing present-day political, economic, social, and technological challenges will tax the focus and imagination of most executive leadership teams. Notwithstanding a continuing post-COVID-19 malaise, there are certain constants that strategic planners can apply, through incrementalism, to raise their company's performance above the productivity mean of their competition.

One form of incremental adjustment is a deliberate strategy to improve the talent quality within the company. (Seventy-seven per cent of survey respondents believe the lack of talent quality is a current or likely threat to the end of 2023.) The talent pool for quality is shallow, but this phenomenon has been around for a while. Quality talent has always been in scarce supply, becoming more pronounced as retirements and resignations have drained the talent pool.

Considering the statistically supported adage that 20% of a firm's employees are responsible for 80% of its output, it would follow that a science-based hiring strategy that consistently adds talent from the upper quartile of the industry will, over time, secure the company's tomorrow.

"Quality Talent Has Always Been in Scarce Supply"

Industry Threats & Job Opportunities in 2022 & 2023

2022 - Current & Emerging Threats

The trending opinion in our 2022/23 PEST analysis reveals that senior executives expect all levels of government to be active players in accessing Canada's credit markets while increasing personal and corporate taxes, development fees and regulations. Governments competing for capital within an inflationary market will impact asset repositioning and development proformas. Developers with shovel-ready projects and funds in place are making every effort to expedite their projects through 2022.

"Demand for Development, Construction, Finance/Accounting, Investment Expertise in 2022"

2022 - Most Active Positions

The most active growth positions in 2022 are related to responsibilities associated with back-end development, construction, finance, accounting (particularly project accounting), analytics, and investment/acquisition.

2022 - Top of Mind Threats

The top-of-mind threats through the remainder of 2022 affecting resource plans and feeding market uncertainty are:

• Rising CAP rates - 35% of respondents expect an increase in 2H/22, continuing through 1H/23 and tapering slightly in 2H/23
• Russia/Ukrainian war - 75% believe the conflict will contribute to uncertainty through 2022 and taper rapidly in 1H/23.
• Rising Federal Deficit - 77% of respondents have little confidence that the Canadian government will bring its deficit under control during the survey period. In fact, ...
• Currency Devaluation - 32% of respondents foresee an emerging risk by 1H/2023.
• Inflation - 87% believe inflation will continue to rise through 2022 and taper slightly through 2023. The nature of this inflation isn't likely to be hyper but somewhat incremental - 68%
• K-Shaped Recovery - 45% forecast a K-shaped recovery through the survey period, with 35% forecasting a K-Shape will not be evident until 2023,
• Ten-Year Treasuries - 68% anticipate Treasuries to rise through 2022,
• COVID - 6th Wave - remains a lingering scar on Canadians' psyche, as 48% of respondents believe there is a possibility for a 6th wave by 2H/22 through 1H/23. A 6th Wave was declared in Q1/22, months ahead of the survey forecast. This outcome feeds public anxiety for another...
• Emergent Contagion – 47% of respondents agonize at the "likelihood" of another contagion through 2023. Owners should not expect their tenants' employees to return to the office in droves. In fact, ...
• Remote/Hybrid - 60% of respondents believe remote work arrangements will remain an industry threat through 2022 and only begin to taper in 2H/23.

2023 – Employment Demand & Emerging Threats

The industry threats respondents anticipate for 2023 underscore the importance of acquiring talent with back-ended development and construction expertise through 2022. This is followed by hedging market uncertainty by hiring professionals in 1H/23 capable of effective building operations and asset management.

"Respondents Hedging Market Uncertainty in 2023"

2023 - Positions in Greatest Demand

In 2023, positions connected to preserving asset and portfolio values will dominate. Roles spanning credit risk analysis, appraisal expertise, property and asset management, balancing investment portfolios and front-of-the-office customer/tenant experience management. Although leasing positions will experience the most churn relative to all functions surveyed, 37% of respondents will hire leasing professionals, while 57% will keep their staff in place.

2023 - Top of Mind Emerging Threats

The top-of-mind threats emerging in 2023, which will affect corporate resource plans along with feeding market uncertainty, are:

Political:

• European Union economic weakness - 35% of respondents expect Europe to undergo some form of destabilization beginning 2H/22 and continuing through to 2H/23,
• China/Taiwan - 59% of respondents believe Chinese aggression will begin and end in 1H/23. The brevity of this timeline would imply that no one is confident Western countries will come to Taiwan's aid.

Capital Access:

• Construction Finance Constriction - 40% of respondents expect a constriction in construction finance beginning on 1H/23 and continuing through 2H/23,
• Project Finance Constriction - 41% of respondents expect project financing to constrict beginning in 2H/22 and continue through 1H/23,
• Structured Debt Constriction - 26% of respondents foresee a tightening of structured debt beginning in 1H/23 and tapering in 2H/23.

Workplace & Tenancy Travails

• Workplace Design/Repurposing of Space - seen as an early response when stay-at-home mandates were deemed temporary, 70% of respondents believe this activity will continue through to the end of 2023,
• Tenant Insolvency/Bankruptcy - 59% of respondents believe insolvency and bankruptcy are evolving threats beginning 2H/22 and will only run their course in 1H/23. The concern stems from believing banks are not acting on delinquent commercial covenants. Credit risk analysis, including sensitivity testing the viability of existing and prospective tenants, will likely become the norm,
• Rental Rates - 76% of respondents expect decreasing rental rates to be a threat factor in 2023,
• Lease Renewals - 68% of respondents admit lease renewals have been challenging through 1H/22 and expect further difficulties in 2H/22 and 1H/23, with some tapering in 2H/23.

Conclusion: Workforce Resilience or Malaise of Purpose

The pandemic of 2020 caused a wave of changes worldwide, leaving an indelible mark on our collective mindset. From 'The Great Retirement' to 'Great Resignation' and finally ending in what experts call a ‘Lying Flat’ phenomenon, COVID has birthed a societal state of mind that we call ‘The Great Malaise Of Purpose'. This aptly describes how individuals from multiple generations have been affected by lockdowns, remote working mandates & lower standards of living - a malaise we must find the resilience to purge if Canada is to move forward as a crucible for individual initiative and common purpose!

Real estate has always been a reliable indicator of the nation's economic climate, but it is not its main driving force. With four recessions now under our belts, it’s clear that real estate markets experience dramatic shifts - often leaving behind only bricks and mortar. But this lack of traditional momentum can also be seen as an opportunity for creativity; with clever repurposing measures, owners/developers endure and even thrive in changing times!

"Real estate is a community of optimists and dreamers"

Real estate professionals are a community of optimists and dreamers, where ambitious entrepreneurs prevail no matter the odds. Despite looming cautions for this industry in 2023, an overwhelming majority of survey respondents remain confident yet vigilant - possessing both prudent caution combined with a powerful ambition to thrive!