As 2023 comes to a close, property data and insight business, Search Acumen, reflects on a challenging year for real estate companies and property lawyers, and outlines its predictions for 2024:
- With €200m of real estate debt maturing in 2023/24, the cost of capital was the most powerful force impacting market activity in 2023, and this will continue to be the case in 2024.
- With capital costs at their highest peak since 2007, investors, developers and portfolio managers will have to spend more time focussed on their debt strategies, while high borrowing costs will likely subdue transactional activity and postpone investment decisions.
- The launch of Chat GPT in 2023 was a game changer for the property and legal sectors in terms of technological innovation and digitisation. The rapid development of AI and its integration into everyday commercial operations for real estate companies and property law firms will be a defining theme for 2024.
- From 2024, success for companies in real estate or law will be determined by how effectively they are able to harness data and new technologies.
- AI offers vast potential but 2024 could see the emergence of a digital skills gap in the legal and property sectors that hinders progress.
- 2024 to be a make-or-break year for hybrid working, which could lead to a renaissance for the beleaguered UK office sub-market.
Cost of capital will continue to subdue market activity in 2024
Over the course of 2023, interest rates have risen to 5.25% in the UK to combat inflation. The cost of capital is now at its most expensive level since 2007. This had a significant impact on market activity this year and, with approximately €200 million worth of real estate debt set to mature in 2023/24 in UK, France and Germany alone, the cost of borrowing and debt servicing will continue to be the defining theme of 2024’s real estate market.
Andrew Lloyd, Managing Director of Search Acumen said: “Rate rises have been the primary lever the Bank of England has pulled to combat significant and stubborn inflation through 2023. Inevitably, such large increases in the cost of borrowing have subdued the residential and commercial real estate markets as transactions and asset management decisions have been shelved or postponed with investors instead focussing on debt servicing. We have seen evidence in Q4 that this monetary plan is working, with inflation now below 5%. While this suggests the worst economic conditions are behind us, I don’t think we will see significant improvements in 2024, given the scale of debt that will mature next year, and because we still have some way to go before we hit the Bank of England’s target rate for inflation.
“We have in the last few months seen some easing off on rates for residential mortgages which will help some homeowners and again suggests brighter days are ahead. But, unfortunately, the full impact of base rate rises on markets usually has a significant lag which means 2024 will likely be another subdued year as firms try to navigate increases in their debt servicing costs and continue to find new loans are expensive and harder to obtain. With the prediction that inflation will be at target rates by the end of 2024, we will hopefully be able to provide a more optimistic outlook by Q4 2024, looking to 2025 as a year where we may see more significant opportunities for growth.”
2023 was AI’s breakout year but from 2024 it will define the shape of the market
2023 saw AI arrive in the public consciousness with ChatGPT, Bard and more recently Elon Musk’s Grok becoming household names. AI is not new, but for the first time its immense potential to revolutionise the property and legal sectors became fully apparent. As such, through 2023, firms have been investing significant time and resources to understand what this technology means for their organisation. 2023 was a break-out year for AI, but Search Acumen predicts that 2024 will be the year that AI will start to be integrated into firm’s day-to-day operations as standard, with most companies recognising they will quickly lose their competitive advantage unless they do so. Search Acumen in 2023 became one of the first companies in the legal sector to integrate ChatGPT into its platform, accelerating the development of its new Real Estate Intelligence (REI) software. This was the first time the tool had been used to support property lawyer’s day-to-day functions, marking the company as a true innovator in the sector, and signified a huge step towards rapidly automating parts of the process.
Andrew Lloyd said: “The genie is out of the bottle. As a technology business, we’ve had AI integrated into our digital legal and property data platforms for almost a decade, but 2023 was the first time where the industry and the public collectively grasped the seismic potential of this technology. That’s largely because applications like ChatGPT and Bard have risen to such prominence, making AI truly accessible for the first time. Progressive firms have already started integrating AI and 2023 will go down as AI’s break-out moment, but 2024 is when firms will really start grappling with integrating AI en-masse. Now the potential is widely understood, and firms know that failing to grasp the AI opportunity will put them at a significant disadvantage, integration will happen incredibly quickly. By the end of next year, we’ll already see AI more as a baseline standard for most business operations than an experimental technology for special projects. Where 2023 saw the emergence of AI, 2024 will be the year that it starts to truly define success in the legal and property sectors and take a lead role in reshaping market activity.”
Digital skills will emerge as a major challenge for legal and real estate firms
Technology has developed at a rapid pace in 2023. Search Acumen foresees an emerging challenge for firms of having the right skills available to properly leverage AI at scale.
Lloyd continued: “While industry and government has rightly been focussed on big issues around AI’s potential and how we can utilise the technology safely, I do see a challenge coming down the track pretty quickly around digital skills. The technology is developing at light speed and fully leveraging its potential is dependant on re-gearing our economy and our society to take advantage. But, as is usually the case with innovation, it takes a lot longer for these socio-economic impacts to be understood and planned for. One of the biggest areas where we will notice this lag is in skills. The technology will outpace our ability to keep up in terms of a digitally up-skilled labour force, and that could well cause problems next year for real estate companies and law firms as they start to think about scaling their use of AI.
“Short term there is going to be a really important role to play for third-party technology companies helping clients navigate the transition. However, with the proptech and legal tech markets expanding rapidly and new solutions being launched on an almost weekly basis, it’s vital that firms are savvy about the technology partners they choose. While I should probably be telling the property and legal sectors to simply choose Search Acumen, I’d actually advise companies to run more robust tender processes to ensure that they are able to find suppliers that can meet their objectives, have an established track record and offer value for money in challenging economic times. In the medium to long term, real estate and legal businesses really have to start prioritising the skills they are going to need for the coming decades, and I expect we’ll see the industry increasingly look outside of its usual talent pools to bring more people with technology and innovation expertise into senior leadership roles.”
2024 will be make-or-break for hybrid working
While cost of capital has impacted all sub sectors, rising borrowing costs plus the impact of post pandemic hybrid working, has had a disproportionate impact on the office sub-market. Search Acumen’s research in 2023 found that 1.47 million square meters of office space was lost in England and Wales in just 12 months, as many companies cut down on their floorspace with more people working remotely. Despite the vast popularity of more flexible working since the pandemic, Search Acumen believes 2024 will be a make-or-break year for hybrid working, which could lead to a renaissance for the beleaguered office sub-sector.
Andrew Lloyd comments: “I don’t think we’ll ever go back to a pre-pandemic 9-5, five days a week office-based culture. Most firms have recognised that there is a lot to be gained in terms of productivity by allowing employees work more flexibly when they need to. That being said, I do think there is a consensus building around the collaborative and creative value of bringing staff together in the office more frequently than we have seen over the past few years. I actually think 2023 saw a rebalancing for many employees too where they perhaps became a little more frustrated with the downsides of homeworking, like the isolation and blurred lines between home and work life. I will be watching office market statistics closely next year as I think it’s one where we could see a bit of a renaissance in terms of activity, as firms look to make their office spaces match the evolving needs of their businesses and their employees. This might mean a boost in occupational and capital markets. It could also mean we see more investment in asset management as, while offices might become more important, what constitutes a good workspace in 2024 is vastly different to what that looked like five years ago.”