Getting Ahead of the Future – June 3, 2024

Deloitte has issued its 2024 Financial Services Industry Predictions, in which the advisory firm outlines what it sees as some of the most significant emerging trends across the financial services industry over the next three to five years. While these trends cut across the broader financial sector—the impact of AI on investing and banking, for example—two of them focus squarely on commercial real estate. 

One of these trends is the impact of climate change on insurance premiums for commercial property owners (the impact on homeowners’ insurance costs is also covered, albeit from the vantage point of insurers). Another is the “retirement cliff” that faces CRE firms in coming years.  

Neither of these trends can be easily ignored in medium- and long-term planning. “Commercial buildings located in states with the 10 highest expected annual loss (EAL) totals according to Federal Emergency Management Agency (FEMA), based on their exposure to natural hazards, have seen a 31% increase in insurance costs year over year and 108% increases over levels from five years ago,” according to Deloitte. These increases compare to 25% and 96% increases, respectively, for states outside of the top 10. 

By 2030, Deloitte says, “the cost premium of being in a higher-risk, extreme weather state could be 24.0% greater than the national average, compared to a 32.5% discount in lower-risk states.” These higher-risk states are home to some of the largest CRE markets. Leading the roster is California, factoring in heat waves, wildfires and riverine flooding along with earthquakes.  

In second and third place are two states that have seen billions of dollars of new commercial and residential development in recent years: Florida and Texas. Weather risks shared by these states include tornados (also a factor in fourth-ranked North Carolina), lightning and extended cold. For an in-depth discussion of this issue with Deloitte experts, click here to read a story in the latest Weekender mailing. 

Naturally, extreme weather can be costly in terms of property damage and loss on top of higher premiums. A different risk of loss stems from CRE professionals exiting the workforce and taking their institutional knowledge along with them.  

“In 10 years, nearly 40% of the total US real estate industry, or just over one million people across all levels, will reach the age of retirement,” according to Deloitte’s report. “That compares to only 23% of employees across all industries, including other financial services sectors such as banking (23%) and insurance (24%).” Accordingly, the real estate industry has the highest median age of any financial services sector: 48.9 years, ahead of insurance (44), banking (43.5), financial investments (43.1) and nondepository credit (41.9).  

Potentially more worrisome is that an outsized percentage of these aging real estate industry professionals hold senior leadership to C-suite positions. “The Deloitte Center for Financial Services estimates that 59% of existing leaders, or around 761,000 people, will reach the age of retirement over the next 10 years,” says Deloitte. In fact, 13% of the industry is already older than the average age of retirement in the U.S. 

When it comes to filling leadership gaps, the younger generation doesn’t provide as much of a cushion in real estate as it does in other financial services sectors. The gap between the number of employees ages 35 to 54 in non-leadership roles and the number of potentially vacating leadership positions is just 28,000 industrywide—a small fraction of the numbers seen in the banking or insurance industries. 

What to do? For starters, plan ahead—far ahead, Deloitte says. “In any given year, approximately 50% of succession plans for [CEOs] in real estate start from scratch, only beginning when existing CEOs transition out of these roles. That reactive, rather than proactive, approach to filling leadership vacancies could lead to business continuity disruptions, especially if timing isn’t aligned. This is because it can take years to plan for leadership succession and errors in judgment can be costly.”