In IBJ’s Thought Leadership Roundtable, Gray Capital and Renovia executives discuss market headwinds, Indy’s resilience and how technology is improving everything from project management to rates rent.
How have the metropolitan area’s commercial real estate and construction markets evolved since the start of the year?
Spencer Grey: The commercial real estate market in Indianapolis has shown strength in 2022 despite headwinds from rising interest rates and economic uncertainty. The biggest difference this year from the frenzy of 2021 is a return to somewhat more “normal” market conditions. While prices are still high and speculative, they are more closely aligned with fundamentals than we saw last year.
Chris Hall: The direct impact of inflation on the construction market has sent shock waves throughout the industry. Indianapolis, like many other cities in the Midwest, is no exception. Supply challenges will continue to ease in the remaining months of 2022, but will continue into 2023. Suppliers will continue to gain a foothold, although labor issues and inflation will be issues annoying things that we don’t see changing in the short term.
How does the performance of these markets differ from that of our peer cities or broader national trends?
Chris Hall: Every city and virtually every industry faces some kind of labor challenge. The Builders and Contractors Association estimates the industry will need to hire up to 650,000 workers to keep pace with growing demand. While Indianapolis has done well individually among its peer markets throughout the Midwest, it’s a trend that will persist long into the future. Another critical barrier in construction has been the slow or non-existent adoption of technology. I think this could be a very big bright spot for Indianapolis given the tech-infused landscape that’s already in place, paving the way for various strategic partnerships.
Spencer Grey: Indianapolis is much less volatile than many other US markets. In the multifamily space, we’re seeing strong demand and strong rental growth, but we’re not seeing the deluge of new construction that many other markets are witnessing. Indianapolis’ stability and value proposition also continues to attract more foreign and international investment.
How is the ongoing labor shortage affecting your industry and how are you responding to it?
Spencer Grey: Finding the right personnel, as well as qualified and available suppliers, continues to be a challenge. Before the pandemic, it was difficult to attract and retain experienced and reliable maintenance staff, and as construction demand picked up in everything from single-family home development to infrastructure projects, it became necessary to pay a premium for good employees. .
Chris Hall: The construction industry is still trying to overcome the challenges associated with attracting qualified candidates. We have an aging population leaving the industry, with approximately 21% of construction workers aged 55 or older; only 9% are 24 or younger. Millennials aren’t gravitating towards construction careers, and a lack of diversity coupled with uncertainty surrounding immigration will only make matters worse. At Renovia, we are excited about what the future holds when it comes to investing in our contractors through professional services and cutting-edge technology. We also use community engagement to help with talent acquisition.
What other market forces affect your industry?
Chris Hall: According to a study by McKinsey & Co., 98% of construction projects exceed their budget and 77% of them experience significant delays. Supply chain disruptions and supply issues began during the pandemic, but extended into 2022. Major shortages related to wood, paints and coatings, aluminum, steel and cement have all plagued the industry. The shortage of these materials caused delays in the project.
Along with the supply chain disruption, many construction companies have had to contend with significant price increases passed on by various manufacturers. As a result, a few large retailers we work with have been much more willing to adapt and use alternative products to meet their commitments. To succeed in the new economy, a company must adapt and provide valid alternative solutions that still meet the long-term objectives of the customer.
Spencer Grey: Volatility in interest rates and bond markets has been the most disruptive force in commercial real estate. Higher interest rates coupled with low cap rates (high prices) have limited the amount of leverage potential buyers can use. This deleveraging reduces some risk in the market, while keeping out many buyers who have historically relied on higher levels of leverage. This has led to institutional investors being even bigger players in the acquisition space than before the pandemic.
What bubbles, if any, do you see forming in commercial real estate here or nationally?
Chris Hall: Conditions are ripe for what many would call a bubble in commercial real estate as prices rise to unsustainable levels. We will continue to see residual long-term effects of inflation riddled across the market, both locally and nationally. Add to that higher interest rates, an ongoing war in Europe with no end in sight, and a presidential election in 2024, and it’s hard to predict where the market is headed. This produces a riskier investment market for everyone.
Spencer Grey: While I don’t see any concrete evidence of a bubble today in the commercial real estate market, the ingredients for a potential bubble are certainly there. If commercial real estate investors speculate that inflation will remain significantly high for an extended period but growth slows significantly, we would expect a much needed price correction.
What about the housing market?
Chris Hall: In other words, we haven’t built enough multi-family housing to handle the significant population increase we’ve seen over the past decade. Gen Z is helping to drive this demand, although many baby boomers are taking advantage of the booming real estate market to sell their homes. The trend towards workforce housing is likely to persist, increasing the demand for flexible and convenient housing versus the responsibility or hassle of owning your own home. Outside of Indianapolis, many markets have limited housing supply, but new housing starts remain steady. It brought positivity to what some might call a “looming big downturn.” We always see buyers of multi-family projects entering the market, but before COVID you might have seen up to 24 buyers coming to the table. Now we see half that number, if not less, as the market has tightened.
Spencer Grey: The multifamily housing market is currently benefiting from the lack of affordability of single family homes due to higher interest rates, resulting in a much larger monthly payment. Renting an apartment is now five times more affordable than buying a house compared to 2019. Many millennials who were in the market to buy their first home can no longer qualify and are putting off the prospect of becoming a homeowner in the foreseeable future. The high barrier to buying not only drives rents into Class B and A space, but has also created low vacancy levels. At the same time, we are seeing weakness in market-rate labor housing as inflationary pressures such as gas and food costs cap rent growth for low-income tenants. Eviction and delinquency rates are also high among this demographic, although they are still below pre-pandemic levels.
How are emerging technologies changing your industry?
Spencer Grey: The continued adoption of automated revenue management software that uses algorithms and daily market data to set new apartment rents daily based on current market prices and availability has dramatically changed the apartment market. these last years. Although the technology has been around for a while, it is now widely used in the multi-family industry. The result is a much more efficient market as well as rents that vary significantly depending on the day a potential tenant visits a property. In the past, property managers used their sense of the market to set rents, usually on an annual or quarterly basis. The use of this technology has certainly been a factor in rent growth four times what we would see in a typical year.
Chris Hall: The industry as a whole has been slow to adopt technologies that could equip and connect multiple distribution points along the value chain. Companies are now considering multiple SaaS platforms capable of connecting people, processes, and assets to enable greater digital understanding of day-to-day operations. What we’re seeing now are small and medium-sized businesses looking for a platform that can connect their portfolios, creating a more manageable transparent process related to capital expenditures, facility maintenance, and development projects. improvement of tenants. Continuing to invest in data, analytics and user experiences is essential if you are looking to innovate in the future.
Data collection apps, drones and artificial intelligence are all starting to become the norm in construction as tablets and smartphones improve connectivity and communication from job site to job site. Along with the benefits to customers, companies are collecting more accurate and better data to provide a real-time picture of the changing costs and timelines of projects to be delivered to the customer. Drones are becoming more prevalent in today’s world given the precision and interactive data they can collect on a job site. This is especially important for limited budget projects where access is difficult and accurate cost projection is a challenge. Meanwhile, the use of artificial intelligence has significantly helped our business create forecasting metrics and cash flow projections that help fuel growth.