Council in the News
Economic Outlook • Commercial Real Estate
What’s ahead in 2023?
Here’s what several Massachusetts business leaders expect will be the biggest challenges to their industries in the coming year.
Boston Business Journal | January 27, 2023
Left to right are Kendalle Burlin O’Connell, CEO, Mass. Biotechnology Association; Jon B. Hurst, president, Retailers Association of Mass.; Sara Fraim, CEO, Mass. Technology Leadership Council; Christopher R. Anderson, president of the Mass. High Technology Council; Tamara Small, CEO, NAIOP Mass., The Commercial Real Estate Development Association; and Lora Pellegrini, president and CEO, Mass. Association of Health Plans.
KRISTINA WALSER/BBJ
Here’s what several Massachusetts business leaders expect will be the biggest challenges to their industries over the course of 2023.
“The year 2023 is expected to be a bumpy one for commercial real estate. The Financial Stability Oversight Council’s Annual Report recently listed commercial real estate as one of its top market and credit concerns due to rising interest rates, borrowing costs, and uncertain economic conditions. In the Greater Boston market, the “flight to quality” trend where tenants are opting for new, highly amenitized Class A space will continue this year — particularly for lab and office tenants. Sublease space and vacancy rates, already at the highest point in 20 years in Boston, will continue to climb in both the downtown and suburbs. Companies seeking space will have many options. Class B and C office properties will continue to struggle. In order to compete with Class A space, costly renovations will be needed – at a time when financing for such projects is difficult given the shift to remote work. While office to residential conversions may work for a very small number of buildings, they are often cost prohibitive. For owners without the option to upgrade or convert, distressed real estate — where owners hand over the deed to lenders — may be a concerning trend for 2023. For new development, the outlook is not much brighter. High interest rates, construction costs, and costs associated with new state and local regulatory requirements, combined with lenders pulling back from commercial real estate, may make it difficult for some development projects to proceed this year. This is particularly concerning given the extraordinary need for new housing throughout the Commonwealth.
“In cities like Boston where 74% of the city’s budget comes from property tax revenue, policymakers should take note. Even a slight dip in that revenue could have dire consequences for city services. Recognizing this, in 2023, state and local officials should roll out innovative ways to encourage new development, reduce regulatory burdens, and support property owners who play a crucial role in ensuring residents have access to the services they need.”
— Tamara Small, CEO, NAIOP Massachusetts, the Commercial Real Estate Development Association
“I’ve done so much work as it relates to making sure that we’re creating pathways, particularly for our minority communities, into life sciences jobs. We will continue to invest in that as it relates to Southline, (the new biopharma workforce training center set to open in September) … That’s No. 1.
“Economic competitiveness and making sure Massachusetts stays the best place in the world for life sciences (is a priority). I mean, we are so fortunate to have this title, and we can’t, for a minute, take that for granted. We’re going to have a lot of opportunity to showcase why Massachusetts is the best place in the world for life sciences this year. Of course, the BIO International Convention is coming back to Boston in June. Last time it was here was in 2018. We always have big shoes to fill when it’s here. In 2018, we have 22,000 attendees, the biggest of any location in the country. So we want to continue to exceed expectations.
“Also, it’s a really important year as it relates to the Life Sciences Initiative, (a spending bill that provided the funding for the Massachusetts Life Sciences Center and other investments under Govs. Deval Patrick and Charlie Baker). The current iteration is set to sunset in June, and we’re really excited to work closely with the new administration to make sure that we can get a Life Sciences initiative 3.0 reauthorized. I think it’s incredibly important, obviously, for the companies that are here, but (it’s also important) as we think about continuing to recruit companies to Massachusetts and retaining companies here in Massachusetts.
— Kendalle Burlin O’Connell, CEO of the Massachusetts Biotechnology Association
“Despite an economic slowdown, talent remains at the crux of the tech sector’s challenges for 2023. While much of the attention has been focused on the large tech companies who are right sizing their workforces as a result of the post-Covid economy not playing out as expected, many tech CEOs continue to struggle to fill open roles. Managing a remote workforce also remains a top challenge for tech executives. Further exacerbating both issues, is the migration of talent leaving Massachusetts due to the lack of affordable housing and reliable transportation options. These continue to fuel the need for a more distributed workforce, pushing companies to expand operations outside of the state — ultimately an issue not just for tech, but for the entire Massachusetts economy.”
— Sara Fraim, CEO of the Massachusetts Technology Leadership Council
“Coming off a year of record financial losses, our healthcare community is hoping for a brighter 2023. In particular, the new Medicaid waiver presents a historic opportunity for hospitals to invest in ways that will improve clinical and health equity outcomes. However, enormous financial pressures will remain – especially those related to filling an estimated 19,000 job vacancies, shouldering persistent cost inflation that cannot simply be passed onto consumers, and underpayment for crucial services like telehealth and behavioral health. These are the factors that have the greatest influence over access and cost, and they must be a central focus of every healthcare policy consideration in 2023.”
— Daniel McHale, vice president, healthcare finance and policy at the Massachusetts Health and Hospital Association
“In 2023, the possibility of another Covid surge, the impact of a heightened flu and RSV season, and the likelihood of a recession will put even greater pressure on health plan finances. Health plans could face potential membership losses if unemployment rises, and investment income earnings will continue to be unpredictable due to volatility in the stock market. Health plan margins continue to be thin or negative, and the volatile environment makes actuarial assumptions challenging.
“In 2023, health plans will continue to work on contracting strategies that reward value over volume and advance new ways to reward providers for improving health, addressing equity, incorporating social drivers of health, and lowering costs. Health plans will also continue to leverage technological solutions that can make health care simpler to administer such as electronic prior authorization that can provide approvals in seconds.”
Lora Pellegrini, president and CEO of the Massachusetts Association of Health Plans
“Senior executives are preparing for the risk of a recession. Most cite softening demand and rising costs as they work on cost-cutting plans to adjust operations. Massachusetts is the only state to raise taxes on Jan. 1, (11 states cut taxes), and the declining business environment in the Commonwealth will exacerbate recessionary impacts.
Hiring is shifting to other US and global locations away from MA due to cost considerations. One executive reported “With more employees insisting they can work from anywhere they are choosing not to work here. They have options in this area and are exercising them accordingly.”
A huge problem for Massachusetts: the redomiciling of senior executives is at a record pace. Florida Registry of Motor Vehicles offices were packed in December with former Massachusetts residents obtaining driver’s licenses in their new home state, a trend likely to accelerate in 2023.
— Christopher R. Anderson, president of the Massachusetts High Technology Council
“Will increased sales outweigh increased costs? That is the question that restaurant owners across Massachusetts are grappling with. Guests continue to flock to restaurants, as sales numbers are far outpacing prior year levels.
However, there remain a few issues of concern. While recent trends have indicated the labor situation has improved, available labor is an obstacle, resulting in reduced hours of operation. Overall supply-chain tensions have eased, but the random lack of product availability requires menus to be flexible. Inflation continues to be the biggest challenge and menu prices can only go so high. Areas of the commonwealth where workers have not returned to the office have stalled the recovery for restaurants that populate these areas.
Pandemic-related changes, such as outdoor-dining experiences, and the growth of take-out options, including cocktails to go, will continue to be popular, as the restaurant industry continues to grow and recover.”
— Stephen Clark, president and CEO, Massachusetts Restaurant Association
“Inflation and rising interest rates have replaced pandemic restrictions, supply chain and labor shortages as the primary headwinds for retailers. Along with inflation, hybrid work has shifted consumer spending from some sellers to others. No matter whether your sales are up, flat or down, the rising costs of payroll, inventory, energy and health insurance are going to make profitability more difficult for 2023.
Another challenge is the rapid creation of bus and bike lanes that have taken away parking thus harming the very same retailers injured by hybrid work patterns. Our elected leaders need to pay attention to that. Consumer convenience, safety and value are vital to profitability going forward — and should a recession occur, the hope is that it will be mild to prevent more dark storefronts on our main streets.”
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