At the close of each quarter, LightBox’s Environmental Due Diligence Market Advisory Council, a broad-based cross section of leaders from consulting firms across the US, share their insights from the field on key market developments, business challenges, client sentiment and expectations. In the second of this two-part series, we share the top business challenges that environmental consulting leaders are facing in today’s uncertain market. [Part one highlighted where industry leaders are seeing strong growth for Phase I ESAs at this stage of the market cycle, and what it means for the near-term forecast.]
Like the rest of the commercial real estate industry, the Phase I Environmental Site Assessment (ESA) market is navigating a challenging market landscape. For a real-world perspective on what leaders of environmental consultants are experiencing and how they are responding to top challenges, we turned to the Market Advisory Council.
Based on responses to the Q3 survey, the three top business challenges facing Phase I ESA market leaders are:
Macro Challenges at the Forefront
The macroeconomic issues impacting commercial real estate are top of mind for environmental consultants: inflation, the labor market, and the future path of further interest rate cuts. With the election results in the rearview mirror, concerns now turn to the policy implications of a new federal Administration in areas like banking regulations, climate change, affordable housing, and others. Council members also expressed concerns about the threat of disruptors to the broader market, including growing geopolitical tensions and regulatory uncertainty.
Fluctuations in the latest pricing data provide evidence that the Fed’s long battle against inflation is not over. With the second interest rate cut on the books, one more Fed meeting remains before year-end. After that, the future path of rate cuts will depend on what inflation and labor market data show as well as the transition to a new Administration which could impact future monetary policy.
Business Challenges Around Low Lending and Staffing
At a business level, market council members are challenged by staffing levels in an uncertain market, continued turnaround time pressure, low lending levels, and the talent war. At this uncertain stage of the market, staffing issues are challenging, ensuring there is adequate staffing to handle increased volume while not over hiring. With heightened activity in the first three quarters of 2024, having the right talent to meet client needs without straining resources is essential. Looking ahead to 2025, the ability to adapt swiftly to changing conditions—whether to support continued growth or respond to a potential slowdown—will be crucial.
“A challenge in the current market is staffing strategically to meet increasing market demand but also remaining prepared for unpredictable current events that could quickly change the market (for example, the transition to a new administration, Ukraine and Israel wars, and the port worker strike).”
– Kevin Karr, National Practice Leader Environmental Site Assessment, CBRE
Consultants who support lenders are concerned with banks’ reluctance to restart originations activity while also seeing an early uptick in refinance activity. Business challenges include continued intense pressure on pricing, efficiency, and turnaround time, especially on large portfolio projects that tax resources.
“Many lenders are over saturated in CRE concentration. This combined with value erosion in certain markets, tightening credit standards, increasing insurance costs and hesitancy with the upcoming election, will likely result in a relatively flat market through Q4 and early 2025. As investors become more comfortable with the new administration and reduced interest rates, CRE transaction volume should increase throughout 2025.”
– Ben Bremer, President, LCS
Navigating Rapid Adoption of AI
According to the survey, consultants are also grappling with the rapid adoption of technologies like generative AI and their impact on data collection and analysis processes in Phase I ESA projects. Technology is increasingly reshaping how consultants handle traditional tasks, making it crucial to integrate new tools thoughtfully. This means setting up controlled environments for implementing these technologies, where data can be securely and effectively managed.
A key challenge lies in structuring data to make it accessible and valuable, which often involves breaking down internal silos and reanimating older datasets for better insights. While advanced tools can automate much of the work, experienced consultants still need to apply their judgment to interpret the data accurately. In many cases, technology can handle around 80% of the process, but the final 20%—the part that requires human insight and critical thinking—remains crucial.
Despite the Challenges, Green Shoots Emerge
As this new growth cycle for CRE gets underway, the strongest point in favor of future CRE transactions growth is the sheer volume of capital raised to take advantage of opportunistic investments. Eventually this capital will be deployed, and as interest rates come down, the math behind deals will work out better than it has in the past few years. In case you missed it, part one of this two-part series highlighted where industry leaders are experiencing growth for Phase I ESAs.
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