By Brian Goray, Karen Kosiba Edwards

Building Tomorrow is a curated series offering exclusive one-on-one discussions with prominent executives across the real estate spectrum. Through a refined lens, each installment unpacks trends, challenges and exemplary leadership strategies steering the trajectory of specific segments within the real estate landscape, offering a concise yet comprehensive understanding of market dynamics.

This interview features Stephanie Duncan, Board Director, ULI and CREW Washington, and former Chief Operating Officer, Stonebridge. Part I examines the evolution of commercial real estate, its implications on the post-pandemic economy, and the emergence of the new urban model. Part II delves into the ongoing debate of work in progress – remote, hybrid, or in-person, the pursuit of sustainability and profitability with a balanced approach, and the essential role of leadership in the real estate industry.


The Evolution of Commercial Real Estate 

Boyden: How has the perception of real estate as an asset class changed over the years? 

Duncan: Institutional funds began investing more seriously in commercial real estate after ERISA was enacted in 1974, which allowed pension funds to invest in a broader range of assets. Since then, large office buildings and major shopping malls with credit-worthy tenants have allowed investors to deploy capital efficiently and provided stable cash flow with relatively low risk. Over time, core portfolios also grew to include multifamily and industrial assets. My career has followed many of these cycles – starting in single-family residential construction, transitioning to office and then to senior living and finally mixed-use development. 

Boyden: How have pension funds and other institutional real estate investors reacted to turmoil in the capital markets? 

Duncan: For the past 15 years, robust rent growth, declining cap rates and rising property values resulted in unusually strong returns for commercial real estate. Much of this appreciation was fueled by the octane of near-zero interest rates. After a pause early in the pandemic, the market continued to surge with strong apartment rental rates and warehouse demand.  But with recent interest rate hikes, bonds and other assets offer more compelling risk-adjusted returns.  Real estate now faces more competition for capital.  As the Fed tries to control inflation and avoid a recession with higher interest rates, slower job growth, reduced space demand, and slower rent growth will all help suppress real estate investment. 

BoydenHow has the real estate product mix changed for institutional investors? 

Duncan: During my career, my portfolios have included office, multifamily, retail, mixed-use and senior living. I’ve seen cycles and demand shifts from CBD to suburban offices and back, shopping malls to town center style communities, suburban subdivisions to transit oriented mixed-use multifamily. Migration to the Sunbelt and the rise of e-commerce are not new trends, but the past three years have created more significant and permanent shifts than we’ve witnessed for several decades. 

BoydenWhat are the challenges today for commercial real estate (CRE) investors?   

Duncan: CRE investors face decreased availability of capital and a higher cost of capital. With tightening loan standards, fewer lenders, and higher borrowing costs, CRE buyers and developers could have more difficulty deploying capital for purchases in 2024. The Mortgage Bankers Association estimates there is over $1.2 trillion of commercial and multifamily mortgages maturing in the next two years – representing over 50% of outstanding commercial real estate mortgages. Borrowers may face refinancing difficulties and that may put downward pressure on values. 

BoydenWith all that debt coming due, what should we be looking for? 

Duncan: All things are not equal across all real estate sectors. High-quality assets will continue to perform well as the flight to quality accelerates.  The value gap between better-quality and lower-quality assets has clearly widened. Cushman & Wakefield estimates nearly 60% of existing US office inventory needs reinvestment or to be upgraded with another 20% being completely undesirable without major work. High-migration areas in the southeast enjoy strong demand, but continued construction in these markets may weaken fundamentals. Every city -- every property -- has a unique story, and investors are more selective than ever. 

Commercial Real Estate and The Post-Pandemic Economy 

BoydenIs there any place in real estate investing where we can find stability?  

Duncan: Nearly all real estate sectors are facing challenges in today’s market. As we continue to redefine how and where we work, live, learn, shop and travel – all these sectors are changing. Many institutional investors are looking at alternative sectors – such as data centers, single-family rentals, senior care, logistics and life sciences. 

BoydenIt sounds like real estate is more responsive than ever to the changes – and opportunities – we see in the economy and society. 

Duncan: One of the areas I find most interesting right now is technology to support real estate – from the physical operations to transactions and financial reporting.  With labor shortages and pressure on operating expenses, it’s critical to utilize technology to streamline processes, improve tenant engagement and add resilience to operations. There are more tools available to allow for team collaboration and information sharing.  Additionally, enhanced ESG and financial reporting requirements demand greater information transparency and improved measurement tools. Many real estate firms lack the necessary data, processes and internal controls. Deloitte’s 2024 Real Estate Outlook survey found 61% of global real estate owners and investors are still dependent on single purpose legacy technology. Data that could be useful is often trapped inside these legacy systems. 

BoydenSo CRE management has grown in sophistication? 

Duncan: Yes, we are utilizing technology in new ways, but it’s important to emphasize utilizing shared data vs stand-alone systems. As someone with a strong background in risk management and governance, I cannot overemphasize the importance of data integrity and internal controls. The ability to deploy timely data-driven decisions is a competitive advantage that will set leaders in the industry apart from the rest. 

BoydenWhat real estate profession would be most threatened by artificial intelligence (AI)? 

Duncan: I have worked with multifamily managers who are increasingly using AI to facilitate the apartment search experience for customers – from simple appointment scheduling to virtual tours from across the country with an AI leasing assistant. Leasing and sales will be impacted, but with a caveat.  When you get into larger transactions, such as a long-term lease for office space, customers still want to deal with another person.  I think AI will provide better data, improving our decision-making in those areas, and the most successful professionals will use AI as a resource.  Decisions that are improved by AI will also drive an acceleration of the value gap as some properties decline while others become more valuable. 

A New Urban Model

Boyden: Many second and third tier cities were seeing renewed growth downtown, then the pandemic came along.  You pointed out that some suburbs also saw growth through walkable town center developments.  What long-term changes do you see in the urban-suburban transect because of the pandemic? 

Duncan: There will still be strong demand in the inner suburbs.  Look at some of the neighborhoods around Washington, DC with a young workforce that wants to be close to entertainment and dining options, and they also want good schools, parks, a yard and features you can’t get downtown. Many second and third tier cities bounced back from the pandemic better than major markets, particularly in the Southeast.  Families will always value walkability and a diversity of shopping, dining and entertainment options that previously only existed downtown. Diversity of use is critical to keeping cities vibrant. 

BoydenWill some buildings have no use at all? 

Duncan: I think we will reach a point, even in our core downtowns, where some buildings will need to be razed.  These buildings are functionally obsolete and the cost to convert them becomes greater than the cost of tearing them down and rebuilding. 

BoydenHow do you get cities to agree to selective demolition?   

Duncan: The first hurdle is to get those owners to accept the value is gone.  People will hold out hope there will be another option.  But at that point, cities will welcome selective removal and rebuilding because it will improve their tax rolls. 

BoydenWhat happens when the cost of tearing down a building exceeds the value of the vacant lot after demolition? 

Duncan: Think about some of the former textile mill towns in North Carolina.  Those jobs went away and the buildings sat vacant for decades until there was another viable use for the land.  We may see similar adaptive reuse. 

BoydenWill that happen in urban areas? 

Duncan: Our cities have been resilient.  They have bounced back a number of times.  There was a time in the 1970’s when New York seemed dead, but it came back.  We won’t see widespread demolition, but there will be some. Over the past decade we’ve seen lots of creative adaptive reuse in DC. At my former firm, we led a redevelopment project converting a decommissioned newspaper printing plant to an office building. But these conversions are complicated and require the collaboration of all parties.

This concludes Part I of our Building Tomorrow discussion with Stephanie Duncan. Part II, to be released late February 2024, will examine the ongoing debate of work in progress – remote, hybrid, or in-person, the pursuit of sustainability and profitability with a balanced approach, and the essential role of leadership in the real estate industry.

About the Authors
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