With inflation hitting a 39-year high in 2022, financial success may be elusive this year. All signs point to interest rates remaining high and even increasing.

Construction costs will also continue to rise, creating additional financial pressure. And the chronic labour shortage and ongoing remote working will continue to have an impact.

For real estate owners and operators, understanding these risks and learning to manage them well will be the only way to achieve success. 

Organizations that focus on risk management will be more successful than others, especially if they are prepared.

 

Profitability

 

Interest rates hit 4.5 per cent in January 2023, the highest rate in more than a decade. As a result, loans and mortgages are more expensive.

Real estate owners should plan for further rate hikes and ongoing inflation, making it more difficult for their commercial and residential lessors to make rent.

The remote work trend continues to impact commercial real estate profits, especially in major cities. 

For example, office occupancy in downtown Toronto remained below 30 per cent, and the national vacancy rate broke records at the end of 2022 when it hit 17.1 per cent.

Across North America, pension funds have slowed their investments in office buildings. Private real estate holdings in offices fell 11 per cent in 2021 compared with earlier years, while holdings in retail fell seven per cent over the same period. 

Indeed, 2023 will be a challenging market for most real estate owners and operators. Insurance capacity will also be limited, leading to rising rates and smaller profits.

 

Vitality

 

The labour shortage is hitting real estate just as hard as other industries across the country. 

In fact, in a world dominated by remote work, half of commercial real estate companies say geographic issues are the top issue in hiring today. 

Construction companies that focus on building and renovation don’t have enough workers to staff their projects. Maintenance, security and cleaning services are also struggling with staffing.

While real estate owners and operators can’t do much to combat the labour shortage, they can focus on easing their own recruiting and retention. 

Using data analytics to develop personalized benefits offers is one way owners can determine the benefits their workers need and want – and make them available. This, in turn, improves employee engagement and worker loyalty.

 

Resiliency

 

Commercial property-casualty insurance is expected to rise five to 10 per cent across the board in 2023, and habitational and multifamily properties should expect to see similar increases. 

There are a variety of reasons for the increase, including rising construction costs and supply chain disruptions. 

Yet, top properties with lower risk profiles will still be attractive enough to earn good rates from underwriters – under the right circumstances. 

Real estate owners can attract these better rates by taking the time to present their risk stories as clearly as possible, especially by sharing detailed information on any steps they have taken to prevent damage or liability claims. 

It will also be helpful to share information on renovations and maintenance, such as new roofing, electrical systems and plumbing.

 

Climate change

 

Anyone with real estate holdings today runs the risk of experiencing damage from catastrophic weather events. 

These weather events were the second-leading cause of business insurance losses globally between 2017 and 2021, totalling more than US$14 billion. 

In Canada, coverage for catastrophic perils will increase by a minimum of 10 per cent, and up to 50 per cent in high-hazard areas. 

It’s worth investing in stronger building materials for new construction, as well as proper maintenance of all holdings to reduce risks. 

Parametric insurance, which pays out a set amount based on the magnitude of the event, may be available in some areas as well.

 

Make a plan

 

To come out ahead this year, make a plan to actively manage your risk and confront challenges head-on.

• Analyze loss trends: Secure better coverage by understanding the causes of large losses and telling your risk story clearly. 
• Improve replacement costs: Work with an expert to better understand current replacement costs, and consider materials and construction techniques that can minimize losses.
• Lean into risk: With risk higher across the board, talk with your broker about going with a policy with a higher deductible to reduce your premiums.