Published on 06, Apr 2023

Simone Grimes On Navigating the CRE Landscape and Aiming for Higher Risk-Adjusted Returns in 2023 

With 2023 well-underway, it is clear that the commercial real estate landscape, while challenging, is also ripe with possibilities. “Navigating it requires a strategic approach and a focus on the changing macroeconomic environment,” says Simone Grimes, Acadia’s Chief Financial Officer and a corporate board member who serves on audit and governance committees. “To succeed, CRE investors will need to focus on strategic, asset-level decisions, risk-adjusted returns, and uneven global trajectories that are expected to force the industry in new directions.”

As CRE investors consider options for their portfolios, she advises that they keep three points in mind:

• Staying up-to-date on the latest trends and developments is imperative when making decisions to construct, consolidate or reallocate portfolios.
• Emerging alternatives like data centers, senior housing, and life sciences present attractive risk-adjusted investment opportunities.
• Industrial properties remain a popular investment option while retail leasing has largely returned to pre-pandemic levels.

Emerging alternatives present higher risk-adjusted returns 

Traditionally, investors have relied on office, retail, and industrial properties for their real estate investments. Simone Grimes reveals, however, that emerging alternatives like data centers, life sciences, and senior housing offer investors higher risk-adjusted returns. 

“Data centers, in particular, are seeing increased demand due to the mass adoption of digital technologies, growth in demand for cloud computing, and increases in data storage capacity,” she says. “Further, the increasing cost of land and the strained supply of semiconductors, a primary component of in-data center infrastructure, is expected to put upward pressure on digital property rents. These factors, combined with the increase in remote work, make data centers even more critical, all of which presents a unique opportunity for investors to take advantage of higher risk-adjusted returns than what they might find in traditional properties.”

Also, life sciences properties are benefiting from multiple macroeconomic factors. The demand for life sciences advancements increased during the pandemic, and the rapid breakthroughs that brought COVID-19 therapies to market have only fueled expectations of more to come. 

“This can be seen in venture capital, which has poured record-breaking amounts of capital into small biotechs. In 2021, US$86.3 billion was invested in biotech, which exceeds the combined 2016–2019 total,” Simone Grimes says.

While the need for specialized facilities and research labs is expected to grow, the size and scope of life sciences facilities are expected to change to accommodate smaller entrepreneurial biotech companies, which can be nimbler when choosing locations than big pharma corporations have historically been. Additionally, the life sciences market has been largely insulated from the decline in occupancy that has followed remote work trends since lab work must be done on premises.  

Senior housing, Simone Grimes continues, is another alternative that is gaining popularity. The aging global population and the nearly 1.2 million people per year who enter senior living in the U.S. alone provide an optimistic outlook for the senior housing sector. Senior housing experienced considerable investment growth in 2021, with a 22% increase in price-per-bed and a 61% increase in investment volume by year-end.  

Office vacancies are on the rise 

The pandemic significantly increased the size of the remote workforce, leaving many office buildings with higher vacancy rates. Simone Grimes recommends that office owners and investors in lower-quality buildings consider upgrading aging assets, conversions, or alternate uses to avoid the risk of obsolescence. 

“While costly, conversions to undersupplied property sectors can provide opportunities to acquire properties at a market discount,” she explains. “Only 3% of New York City physical office stock is viable for conversion into residential buildings. However, conversions to life sciences buildings are gaining traction.”

Lab and R&D conversions from offices increased by 49% in 2021 from the prior year. On average, class A office buildings sell for US$50 more per square foot (15%) than pre-pandemic while Class B buildings increased by just US$6 per foot (6%). Class B and C buildings could face challenges in bringing in tenants in a market flush with available space, though they present some of the greatest opportunities at a market discount. 

“Investors can also consider investing in flexible workspace solutions, which have become increasingly popular recently. These spaces offer companies the flexibility to rent office space as needed without the burden of a long-term lease,” Simone Grimes states. “This trend is expected to grow as more companies embrace remote work and look for cost-effective office solutions.”

Industrial leasing activity is at an all-time high 

Industrial properties have been a popular investment option for some time now, and this trend is expected to continue in 2023. With e-commerce sales expected to grow rapidly, industrial properties are critical for last-mile delivery and warehousing. Vacancies in the United States and Europe are still at all-time lows, making it a seller's market for industrial properties. 

Simone Grimes advises that investors consider investing in industrial properties located in key logistics hubs or near major cities. These properties will likely experience higher demand due to their proximity to population centers and transportation networks. 

“Globally, the anticipated continued high cost of land and construction as well as the zoning limitations for centrally located facilities should heighten the competition for existing space,” she says. “Therefore, investors must strategically choose their location to take advantage of this trend.”

Retail leasing has largely returned to pre-pandemic levels 

Retail has been one of the hardest-hit sectors in commercial real estate due to the pandemic. “However, with the ease in restrictions and the rollout of vaccines, retail leasing has largely returned to pre-pandemic levels,” Simone Grimes reveals. “Tourism and travel are expected to be important for retail destinations across the globe, as they are still well below pre-pandemic levels.”

According to a recent study published by Deloitte, retailer spending on artificial intelligence (AI) is expected to grow by as much as US$20 billion by 2026. This presents an opportunity for investors to invest in retail properties incorporating AI technology to enhance the shopping experience and improve operational efficiencies. 

The outlook for commercial real estate investors in 2023  

Commercial real estate is a dynamic and crucial sector of the economy, encompassing various industries. The COVID-19 pandemic has significantly affected the commercial real estate market, leading to fluctuations in demand, occupancy, and pricing. 

“As we emerge from the global pandemic, the industry is facing new challenges and opportunities,” Simone Grimes concludes. “With a strategic approach, CRE investors can take advantage of the market changes to maximize risk-adjusted returns.”

Simone Grimes is an independent board member, audit committee financial expert, Chief Financial officer (CFO), and entrepreneur who has a BSC in Accounting, MS in Finance, and MBA from Cornell University. She has held financial leadership roles across various industries, including financial services, big-four (PwC) public accounting, tech, and consumer products. Simone Grimes serves on the audit committee of for-profit and nonprofit boards. 

The views represented are those of Simone Grimes and do not represent the position of Acadia Insurance or W.R. Berkley.