Emerging Risks in Real Estate Development

MENA’s real estate is booming, but so are the risks. 2024 saw record-breaking momentum: → Dubai’s residential transactions surged 55% → Transaction value jumped 20%, hitting $207B But Moody’s latest insights signal that developers must brace for a more complex reality in 2025-26. Here’s what’s unfolding behind the boom: → Construction costs are up: 2–5% in the UAE and 5–7% in Saudi Arabia. → Supply chain delays and skilled labor shortages are squeezing timelines. → A heavy pipeline of pre-sold projects is testing delivery capacity. → Outsourcing is common, but it’s also causing execution slowdowns. But not all signs point to a slowdown. Despite these risks, developers are holding strong land banks and leveraging customer prepayments, helping maintain short-term price resilience even as supply tightens. This means developers should: → Consider hybrid or in-house execution to reduce external dependencies. → Diversify supplier base to mitigate delays caused by bottlenecks. → Strengthen financial planning to absorb cost escalations while preserving margin. → Invest in digital risk management tools for real-time visibility on project health. The next 12–18 months will test speed, agility, and foresight. How is your team planning to balance opportunity and risk in this evolving market?

US Commercial Real Estate Struggles Impacting Lenders - The US commercial real estate market, deeply affected by the Covid-19 pandemic, is starting to manifest significant financial strains on lenders. New York Community Bancorp and Aozora Bank Ltd. recently highlighted this growing concern with their financial setbacks. - New York Community Bancorp's decision to cut its dividend and increase reserves led to a record 38% drop in its stock, signaling deepening troubles in the sector. Similarly, Tokyo-based Aozora Bank's announcement of a loss linked to US commercial property investments caused its shares to plunge more than 20%. - Deutsche Bank AG in Europe also felt the impact, quadrupling its US real estate loss provisions to €123 million. These developments reflect widespread apprehension about declining commercial property values and the potential for loan defaults. - The shift to remote work and rising interest rates are exacerbating the situation, making it costly for borrowers to refinance. Notably, billionaire Barry Sternlicht warned of over $1 trillion in losses in the office market. - Banks are bracing for possible defaults as landlords struggle with loan repayments. An estimated $560 billion in commercial real estate maturities is due by the end of 2025, posing significant risks, especially to regional banks. - Commercial real estate loans comprise a larger portion of assets for small banks (28.7%) compared to larger lenders (6.5%), making them more vulnerable. Regulators are increasing scrutiny of these exposures following recent regional banking crises. - The market for commercial real estate has been in limbo since the pandemic, with transactions plummeting due to valuation uncertainties. However, looming debt maturities and potential Federal Reserve rate cuts could trigger more deals, clarifying the extent of value declines. - Recent significant sales, such as the Aon Center in Los Angeles selling for 45% less than its 2014 price, suggest substantial value drops in the sector. - Regional banks have been slow to adjust asset valuations to market rates, raising concerns about the real value of these assets on their balance sheets. - Multifamily buildings, particularly those subject to rent regulations, are another area of concern. New York Community Bancorp reported that 8.3% of its apartment loans were at elevated default risk, exacerbated by changes in rent laws. - Banks face increasing pressure to reduce their commercial real estate exposure. Some, like Canadian Imperial Bank of Commerce, have started marketing loans on distressed US properties. - The situation indicates that the full impact of commercial real estate challenges on banks, particularly in terms of loan defaults, may become more evident in 2024 and 2025. #commercialrealestate #bankingsector #defaults #interestrates #realestatemarket #banks #propertyvalues #marketanalysis

I know, most commercial real estate professionals rarely think about the relationship between Treasury yields and the dollar. But my podcast guests are repeatedly bringing it up because that relationship, once a reliable signal of market confidence, is now acting strangely, and the implications for CRE are real. Normally, rising yields mean a strong economy, attracting foreign capital and strengthening the dollar. But today, yields are rising while the dollar weakens. The shift follows a wave of bold policy moves out of Washington – tariffs among them – and has raised questions about fiscal discipline, Fed independence, institutional integrity, rule of law, and long-term U.S. credibility. Markets aren’t reacting to strength they’re reacting to uncertainty and for CRE, that uncertainty is beginning to reprice capital, risk, and investor behavior. 1. Yields are rising for the wrong reasons - Higher yields typically mean economic growth which is a positive for CRE. - Now they reflect political and fiscal risk. - For a debt-heavy asset class (CRE), that’s a problem. - Borrowing costs rise, but fundamentals don’t improve. 2. Dollar weakness without trust is a negative - A weaker dollar can draw foreign buyers if confidence holds. - But when the decline signals instability, foreign capital pulls back. - Less liquidity. - Fewer cross-border bids. - Lower pricing support. (I talked about this aspect yesterday, here: https://lnkd.in/d66QNDnb ) 3. Portfolio hedges are breaking down - Treasuries and the dollar have long been safe havens. - If both look shaky, allocators may reduce U.S. risk including in CRE. - When even these safest, most liquid assets stop acting safe, illiquid assets like CRE face sharper scrutiny and higher return demands (lower prices). 4. U.S. starts to look like an 'emerging' economy - The cost to insure against a U.S. government default is now similar to what it costs for countries like Italy - That’s a big deal. - Why? Because trust in the U.S. government is the foundation for how risk is priced, including in commercial real estate. - If that trust slips, even the safest, most stable CRE deals start to look riskier requiring repricing. Bottom Line: This isn’t a blip. It’s a shift in how global capital views the U.S. and by extension, CRE. Expect: * Higher financing costs * Lower valuations * Weaker foreign demand * Tighter underwriting assumptions Until policy clarity and institutional trust are restored, CRE will need to adapt to a more volatile funding environment. *** Tomorrow I discuss these factors - and many more impacting the commercial real estate industry - with John Chang, SVP, National Director, Marcus & Millichap, Research & Advisory Services. Get priority access to the conversation and detailed analysis via my newsletter - subscribe at the top of my profile here, Adam Gower Ph.D.

As we approach the 16-year mark since the 2008 financial crisis, a new threat to our housing market is emerging - one driven by climate change. In a recent article, I explored how rapidly rising insurance costs in climate-vulnerable areas are creating potentially toxic mortgages that could destabilize our entire financial system. Key points: - Homeowners in high-risk areas face skyrocketing insurance costs, often rivaling their mortgage payments. - Many mortgages in these regions may become unaffordable, leading to defaults and foreclosures. - Unlike the 2008 crisis, affected properties may never fully recover their value. - Federal regulators need to reassess risk thresholds for mortgage approvals in vulnerable areas. The challenge lies in balancing financial stability with equitable access to homeownership. Tightening standards could disproportionately impact lower-income communities already facing climate risks. We need to start asking tough questions: - How can we better incorporate climate data into lending practices? - What role should government-sponsored enterprises like Fannie Mae and Freddie Mac play in mitigating these risks? - How can we support affected homeowners while protecting the broader financial system? It's time for a frank discussion about the long-term viability of homeownership in high-risk areas. We need proactive solutions to avoid repeating the mistakes of 2008. Read the full article: https://lnkd.in/etfzZuW7 for a deeper dive into this critical issue. What are your thoughts on addressing this emerging crisis?

The COVID-19 pandemic has ushered in significant transformations in consumption and work behaviors, profoundly impacting the commercial real estate (CRE) market encompassing office, retail, industrial, and multifamily sectors. Key Developments: Remote Work Impact: The ability to work from home (WFH) has triggered a decrease in demand for office spaces, with a return-to-office trend stalling in 2023 and office occupancy lingering at approximately 50% of pre-pandemic levels. E-commerce Effect: The surge in e-commerce has negatively impacted traditional brick-and-mortar businesses, particularly regional malls, within the retail sector. Multifamily Challenges: The multifamily real estate market is contending with rising operating costs, slower rent growth, and increased costs of refinancing, driven by factors including rising interest rates. Concerns from the Federal Reserve: Institutions like the Board of Governors of the Federal Reserve System have expressed concerns about downside risks in the CRE market, citing weak long-run fundamentals due to WFH, elevated valuations, leverage, and rising interest rates. Leverage Concerns: Analysis of an index of CRE debt and CRE prices reveals a decline in prices alongside constant debt levels, indicating a potential rise in leverage within the CRE sector, posing solvency issues and potential defaults. Exposure Breakdown: Banks and thrifts emerge as the largest direct holders of CRE debt, accounting for nearly 40%, while an additional 34% is held in mortgage-backed securities. When considering both direct and indirect holdings, banking institutions are exposed to 40%-75% of all CRE debt. Banks and CRE Risks: Variable Exposures: Not all banks share equal exposure to CRE risks. Banks exhibit diverse business models and lending focuses, influencing their susceptibility to CRE market fluctuations. Bank Characteristics: Banks with larger CRE exposures tend to be smaller in terms of assets, have lower liquidity ratios, lower tier 1 capital ratios, fewer loan-loss provisions, and lower market returns since 2019:Q4. Size Matters: Large banks, with assets exceeding $100 billion, exhibit significantly lower CRE exposure than the average commercial bank in the U.S., indicating that risks from a potential CRE downturn are concentrated in smaller banks. Potential Systemic Impact: While risks may seem concentrated in smaller banks, the 2007-08 Financial Crisis underscores the potential for significant disruptions in financial markets and the broader economy, even from the failures of smaller institutions. In summary, the CRE market is navigating a complex landscape shaped by remote work trends, e-commerce growth, and economic challenges. Concerns about leverage and exposure levels, particularly among smaller banks, underscore the need for ongoing monitoring and proactive risk management in the financial sector. #cre #cref #cmbs #economy #banks #federalreserve

I have been observing, monitoring and learning about the challenges and opportunities some cities are experiencing to maintain their economic relevance. These challenges and opportunities are reflected in The Age of the City which reinforces that successful real estate strategies align capital, design, and governance with how cities function—connected, unequal, climate-exposed, and politically complex. 5 key items emerge: 1. Cities as Engines of Prosperity: Portfolio Positioning Strategy Key finding: Cities, not nations, drive economic growth and opportunity. Real estate implication: Capital should be concentrated in cities with strong economic fundamentals, talent attraction, and global relevance. Developers must think beyond individual assets to city-level portfolio positioning Long-term value depends on aligning projects with a city’s growth trajectory, not short-term cycles Strategic focus: Invest where cities are strengthening their role as global or regional hubs. 2. Connectivity Over Size: Location & Master Planning Strategy Key finding: Connectivity matters more than scale. Real estate implication: Asset value is increasingly driven by transport, digital, and social connectivity Transit-oriented development, mixed-use density, and walkability become core value drivers. Isolated assets face long-term obsolescence, regardless of size or quality Strategic focus: Prioritise locations and master plans that maximise connectivity and interaction. 3. Urban Inequality: Product Mix & Social Integration Strategy Key finding: Inequality is the greatest threat to city stability. Real estate implication: Developments that ignore affordability and inclusivity face regulatory, reputational, and demand risk. Mixed-income housing, community amenities, and social infrastructure strengthen long-term resilience. Social licence to operate is now a material development risk Strategic focus: Design projects that integrate economic viability with social inclusion. 4. Climate Change: Resilience & ESG Strategy Key finding: Cities are central to climate impact and vulnerability. Real estate implication: Climate resilience directly affects asset value, insurability, and financing. Energy efficiency, heat mitigation, flood resilience, and ESG compliance are no longer optional. Assets not aligned with climate realities risk accelerated depreciation Strategic focus: Embed sustainability and resilience at feasibility, design, and lifecycle stages. 5. Governance Gaps: Stakeholder & Execution Strategy Key finding: City responsibilities exceed governance capacity. Real estate implication: Developers must actively manage multi-layered stakeholder environments Planning uncertainty and policy shifts increase execution risk. Strong public-sector engagement becomes a competitive advantage Strategic focus: Treat governance navigation as a core development capability, not a constraint.

Prime London property isn’t as “safe” as people assume anymore. A recent Bloomberg deep-dive highlights an issue quietly affecting some of London’s most prestigious housing stock - including multimillion-pound homes. Subsidence. After recent extreme summers, the risk is no longer theoretical. Here’s what’s driving it: • Clay-heavy soil that shrinks during prolonged dry periods • Mature street trees drawing moisture from the ground • Victorian and Edwardian homes built on shallow foundations • Rising temperatures exposing weaknesses that stayed hidden for decades According to insurer data referenced in the report: – Subsidence claims are rising sharply – Total payouts are in the hundreds of millions – Severe cases can reduce a property’s value by up to 20% What’s changed isn’t just the risk - it’s owner behaviour. Many owners of high-value homes are now funding private engineering solutions upfront, rather than waiting months (or years) for insurance disputes to resolve. That alone tells you how seriously this is being taken. This isn’t about panic. It’s about awareness. Subsidence doesn’t announce itself at purchase. It shows up later - when leverage is lower, costs are higher, and options are limited. In prime London, some of the biggest property risks today aren’t obvious on a viewing - but they’re very obvious once the ground starts moving. For buyers, owners, and advisors, this is no longer an edge case. It’s part of due diligence. Source: Bloomberg

The most dangerous assumption developers make is believing multiple buildings behave like one business. They don’t. I often hear: “I need to keep my guys moving.” That mindset never made sense to me. You don’t take development risk to preserve payroll continuity. You take it to solve a specific problem profitably. Construction taught me something unforgiving: Each project is its own universe. What Developers Get Wrong Developers assume: Sharing trades across projects lowers risk Buying materials in bulk guarantees savings Parallel jobs create efficiency Scale protects margin In reality, forcing economies of scale across separate buildings usually adds risk. Why? Every site has different soil, neighbors, access, and DOB interpretations Schedules move at different speeds Subcontractors run independent businesses with their own crew economics Time—not cost—becomes the constraint When timelines diverge, incentives break. Mobilization, idle crews, and rescheduling quietly destroy efficiency. What looked “scaled” on a spreadsheet becomes chaos in the field. What Construction Teaches Instead Every project must stand on its own. Each deal must: Make economic sense independently Solve a specific market need Survive without help from another asset If a deal needs strength borrowed from another project, that’s not scale—that’s fragility. A real business plan doesn’t ask “How do we make this work?” It asks “Does this deserve to exist?” Real estate is no different. The Sam Zell Test “If you’ve got a big downside and a small upside, run. If you’ve got a big upside and a small downside, do the deal.” In development terms: If you’re massaging assumptions → walk away If downside is real and upside capped → don’t do it If “portfolio logic” is saving a weak deal → stop Even non-recourse loans carry completion, carry, reputation, and opportunity risk. The Truth About Scale Development isn’t scalable. Only project size is. The stress and execution risk are similar whether you build 8, 20, or 40 units. Bigger projects work when they work because: Fixed costs amortize Systems justify themselves Capital has room to breathe But only if the deal is strong on its own. Final Takeaway Don’t chase economies of scale across buildings. Chase clarity and asymmetric upside within a single deal. If you’re not built for that risk: Lend Invest Partner If you are: Go bigger Be conservative Structure defensively Make sure every project can survive alone That’s not just construction wisdom. That’s how capital decides who wins.

What does the Dubai real estate market in 2025 have to do with this sculpture? To me, this year will be all about a balancing act - a market that is both dynamic and challenging. 📈The latest Dubai figures for 2024 show that property values, rents, and population are at their highest levels. 𝗘𝘃𝗲𝗿. These are not just the gross figures but the growth rates across the board. From 2023, property values are up over 16%, average rents are up over 15%, and population growth is over 10%. These are astonishing figures. 💵At the same time, the average salary increase will be, at best, 4% from 2023. These are not my figures but those of a cross-section of respected HR and recruitment firms. Some industries will see more significant increases, but the average Dubai employee can expect stagnant to little salary growth. 𝗧𝗵𝗮𝘁 𝗶𝘀 𝗮 𝗰𝗼𝗻𝗰𝗲𝗿𝗻. 𝗪𝗵𝗮𝘁 𝗗𝗼𝗲𝘀 𝗧𝗵𝗶𝘀 𝗠𝗲𝗮𝗻 𝗳𝗼𝗿 𝗗𝗲𝘃𝗲𝗹𝗼𝗽𝗲𝗿𝘀? 1️⃣ Rising Demand, but at What Cost? As more people move to Dubai, the demand for housing is surging. However, the sharp rise in rents raises questions about affordability for many residents, particularly middle-income earners. At the same time, can Dubai's infrastructure keep up with the pace? 2️⃣ Oversupply Risks Looming? Every day, I see an advertisement for a new developer promoting their latest project. Clearly, there is a rush to push as much new supply as possible to the market. However, due to the long-term cycle from start to completion, the potential for oversupply is a risk that cannot be ignored. More importantly, how well-funded are these new entrants? 3️⃣ Market Fragility The current growth trajectory is exciting but precarious. If rising living costs outpace economic stability, could this drive away talent or reduce long-term market sustainability? 𝗢𝗽𝗽𝗼𝗿𝘁𝘂𝗻𝗶𝘁𝗶𝗲𝘀 𝗔𝗺𝗶𝗱 𝗖𝗵𝗮𝗹𝗹𝗲𝗻𝗴𝗲𝘀 - 𝗔 𝗠𝗮𝘁𝘂𝗿𝗶𝗻𝗴 𝗠𝗮𝗿𝗸𝗲𝘁 ✅ Affordable Housing is the Future Affordable or mid-market housing should emerge as a sweet spot for developers. Tailored offerings for young professionals and families can bridge the gap between demand and affordability. ✅ Differentiation Through Value and Customer Centricity Don't simply build for the sake of building - listen and understand your customers and their pain points. Developers focusing on sustainability, innovative technologies, and community amenities can stand out in a crowded market. Too many developers focus on the investor, so we must prioritize the end user. As Dubai evolves and matures, developers motivated by a long-term view have a unique opportunity to shape its future. How do you see the market adapting to these challenges? What do you think? 🚀 I help real estate companies maximize their development, investment, and organization ROI - and balance challenging market conditions. Contact me to discuss real estate, the UAE market, or any other topic you may have. 🔗 See the artwork here https://lnkd.in/d-fJuu7b

I had the opportunity to organize a Corporate Real Estate lunch with Courtney Fain today in Charlotte. Thank you to everyone who participated as there was a great exchange of ideas, and I walked away with valuable insights. Below are a few key takeaways from the discussion. Organizations are entering 2026 at an inflection point where real estate, technology, and culture are converging into a single strategic decision set. Corporate real estate is no longer a passive cost center; it is increasingly governed through a financial, operational, and human-capital lens. Capital discipline is tightening. Construction costs have risen materially, and tenant improvement allowances are no longer sufficient to support traditional build-out models. Long-term lease commitments are harder to justify, driving a shift toward shorter lease terms, restacking, and phased investment strategies designed to preserve flexibility while managing risk. Portfolio standards are under pressure. Technology and AI are reshaping organizational structure. AI adoption is influencing workforce needs in functions such as marketing and legal, creating both efficiency gains and workforce planning implications. At the same time, cybersecurity and responsible data use are critical as organizations expand data-driven workplace and real estate strategies. Geographic risk is uneven. High-cost urban cores have safety and affordability challenges and influence location strategy and capital allocation decisions.