‘The mood of the commercial real estate market in 2023 was cautious – many investors were in pause mode. However, people seem to be more optimistic about 2024.’
Charles Russell Speechlys real estate partner Cara Imbrailo’s view sums up a somewhat mixed 12 months for the commercial property market. But despite the many challenges standing in the way of an upswing in investment activity, there is a renewed sense of confidence among partners when looking at the
year ahead.
Eastern promise
In 2023, London topped the list for outbound APAC real estate deals over $10m, according to research by MSCI Real Assets, despite outbound Asian investment falling to $18.4bn in the first half of 2023, 10% down on the previous year’s equivalent figure of $20.4bn.
As Hogan Lovells UK real estate head Oliver Chamberlain notes: ‘Overseas investors are very important – we hope to see investment from countries such as Japan and South Korea, as confidence only comes from transactions.’
CMS real estate co-head Marie Scott also offers a positive perspective. ‘There is a lot of money in the APAC region waiting to be invested, but investors are biding their time’, she says. ‘There is still significant interest in the market – we are waiting for that wall of money to come. People don’t like uncertainty and don’t necessarily want to invest in these times, but there is still long-term confidence in real estate as an asset class.’
Irrespective of such uncertainty, Imbrailo is confident of the capital’s prospects as a draw for investment. ‘London remains a very attractive market for overseas investors and there has been a flow of capital from Asia,’ she says. ‘London is seen as a secure long-term investment.’
The political landscape
Marie Scott, CMS
With a general election fast approaching and pollsters predicting a landslide result, all eyes are also on the potential impact of the first Labour government in 15 years.
The new government’s approach to housing is one factor that will be closely watched. Scott comments: ‘The next government is going to have to focus on the planning system to help solve the housing crisis. The system needs an overhaul; it’s too slow and too complex, and there’s a structural barrier blocking development which in turn doesn’t do anything to help the housing crisis.’
Slaughter and May real estate head Jane Edwarde concurs. ‘Housing is still a shortage, particularly affordable housing. The cost-of-living crisis is increasing the demand for affordable housing.’
If the Conservatives are deposed as expected, one legacy they will leave will be the Building Safety Act, which came into law in October 2023, introducing increased responsibilities and provisions for building owners and updating fire safety laws in the wake of the Grenfell tragedy.
As Scott notes: ‘The Building Safety Act is hugely significant for our real estate clients, including lots of ongoing management obligations imposed by the Act that could be really burdensome. Clients and in-house need to understand this from all perspectives and at all stages.’
Edwarde adds: ‘The Building Safety Act is a detailed piece of legislation; clients are very keen to understand it and work out what it means for them.’
Green eyes
One other likely impact of a Labour return to power will be renewed momentum behind the green agenda.
Oliver Chamberlain, Hogan Lovells
Despite Conservative scepticism around net zero and other green policies, the rise of the renewable energy sector in recent years has been undeniable. As Scott notes: ‘There has been an incredible uptick – the number of instructions for example on solar, wind, and battery storage projects is fantastic. This is driven in part by government targets and a general industry desire to move the dial on the green agenda.’
According to the UN Environmental Programme, the real estate market contributes around 30% of the world’s annual greenhouse gas emissions, and amid the rise of ESG, the environmental sustainability of property has become an ever-higher priority.
‘Everyone wants an environmentally friendly real estate sector, but this comes at a price,’ says Chamberlain. ‘I am not sure where the price tipping point will be. It isn’t something we cannot deal with, but this is a challenge that many haven’t got to grips with yet.’
The green agenda has left a lasting impact on the residential sector, with clients placing a strong emphasis on ‘green growth’ and incorporating clauses and requirements related to renewable energy into their considerations. and Edwarde notes that ‘the embedded carbon debate from a planning perspective is a serious issue for all developers to take into account.’
Imbrailo adds: ‘ESG is mainstream now and no longer just a “nice to have”. A building’s sustainability credentials are scrutinized by investors, lenders, and tenants and this is expected to increase as new regulations come in and we get closer to the Government’s net zero target. For property owners, embedding ESG goals across their portfolios is seen as essential future-proofing.’
Office politics
Despite the fallout from the lean years of the pandemic, it has been a positive year in the retail sector. ‘Online retail was an issue before Covid, and the pandemic seemed to be the nail in the coffin for bricks and mortar retailing,’ Scott observes. ‘However, we’ve seen a bit of a bounceback with physical retail, which has stabilized.’
From Edwarde’s perspective, ‘The retail and leisure sectors are struggling due to the cost-of-living crisis, but there remains an interest in BTR and student housing.’
Office space, meanwhile, is continuing to adjust to the impact of the rise of work-from-home, with investors increasingly gravitating towards operational sectors.
In a post-Covid world, attractive and flexible working spaces are becoming a crucial consideration for corporate occupiers, with many employers having to rethink the draw of the office environment.
As Edwarde states: ‘The office market hasn’t died, but is now looked at more thoughtfully and more flexibility is required both in the leasing structure and the physical space. More than ever the office environment needs to attract and retain talent.’
Many companies are adopting anchor days and requirement for office attendance is growing, particularly among large law firms where closer monitoring of office attendance is on the rise. Notably, 2023 also saw an increase in prime rents growing.
Imbrailo notes: ‘Hybrid working seems here to stay but companies still need office space, with many CEOs wanting to motivate employees back into the office. This is leading to what is being dubbed the “hotelification” of offices, which offer amenities beyond what traditional office occupiers would expect and excellent fit-outs, in additional to strong sustainability credentials.’
With a strong occupier demand for prime office space, Edwarde raises the likelihood of ‘a two-tier system, with premium, compliant offices and sub-standard, non-compliant offices.’
As Imbrailo sums up: ‘Clients want more than an office – if you’re marketing subprime office space, you are going to struggle.’
The GC to-do list
When considering what in-house counsel should be focusing on, given the array of regulatory considerations and financial issues to consider, Edwarde advises: ‘I’d expect in-house legal teams to be working closely with a large team to assess and plan their occupational office requirements. Occupational strategy is not just a facilities issue, but will also involve contributions from HR and the recruitment team, the finance function, marketing and investor-facing colleagues, and, ultimately, the board.’
Scott adds: ‘My overarching advice for in-house lawyers is to make the best use of your external lawyers; they are a really good resource and should always be willing to add value.’ ‘You should ask them to identify hot topics to make sure you, your team and the business are fully up to speed.’
Cara Imbrailo, Charles Russell Speechlys
‘There is value in brainstorming between external lawyers and clients so that your lawyers can understand what is relevant to the business: it’s not so much about them providing training on purely technical law, but rather giving user friendly insight into what practical effects the law can have on your business,’ Scott adds.
With the recent rise in ESG reporting requirements, occupiers also need to ensure they are focusing on their longer-term strategies in this area. Edwarde notes that these discussions are moving up the agenda, with occupational standards and strategy now generally being discussed with clients at a much earlier stage.
The other subject that is of course on everyone’s lips is artificial intelligence, and the real estate market is no different in terms of sizing up its potential impact. Scott notes: ‘In real estate, we need to think about the next disruptor, and the next is AI and generative AI. Many are questioning how much should businesses invest in tech; at what point do they invest? Should they be an early adopter, are they at risk of being left behind?’
The inevitable follow-up point on this is that it is not just what clients can do with AI – it’s about what law firms themselves are offering.
‘There is of course a looming challenge to those of us in private practice that clients will expect us to use AI to commoditize our work at a much lower cost, or that AI will allow clients to take that work in-house completely,’ Scott explains. ‘We can’t ignore this but, whilst the technology is currently impressive, it’s far from perfect yet and it will only go so far to replace the value that external lawyers can provide. GCs and their external lawyers should work together to understand what role AI can play now in the provision of legal services and what the future looks like – hopefully AI will be enabling and enhancing lawyers rather than replacing them!’