WHAT’S AHEAD IN 2023?

Here’s what several Massachusetts business leaders expect will be the biggest challenges to their industries in the coming year.

The below excerpt written by NAIOP CEO Tamara Small was originally published in the Boston Business Journal on January 27, 2023.

“The year 2023 is expected to be a bumpy one for commercial real estate. The Financial Stability Oversight Council‘s Annual Report recently listed commercial real estate as one of its top market and credit concerns due to rising interest rates, borrowing costs, and uncertain economic conditions. In the Greater Boston market, the “flight to quality” trend where tenants are opting for new, highly amenitized Class A space will continue this year — particularly for lab and office tenants. Sublease space and vacancy rates, already at the highest point in 20 years in Boston, will continue to climb in both the downtown and suburbs. Companies seeking space will have many options. Class B and C office properties will continue to struggle. In order to compete with Class A space, costly renovations will be needed – at a time when financing for such projects is difficult given the shift to remote work. While office to residential conversions may work for a very small number of buildings, they are often cost prohibitive. For owners without the option to upgrade or convert, distressed real estate — where owners hand over the deed to lenders — may be a concerning trend for 2023. For new development, the outlook is not much brighter. High interest rates, construction costs, and costs associated with new state and local regulatory requirements, combined with lenders pulling back from commercial real estate, may make it difficult for some development projects to proceed this year. This is particularly concerning given the extraordinary need for new housing throughout the commonwealth.

“In cities like Boston where 74% of the city’s budget comes from property tax revenue, policymakers should take note. Even a slight dip in that revenue could have dire consequences for city services. Recognizing this, in 2023, state and local officials should roll out innovative ways to encourage new development, reduce regulatory burdens, and support property owners who play a crucial role in ensuring residents have access to the services they need.”

— Tamara Small, CEO, NAIOP Massachusetts, the Commercial Real Estate Development Association