Today, every business globally has a shared concern: The RECESSION. Every company is trying to learn how this economic downturn will affect them and how to minimize its effects.
Many organizations strive hard to predict the future of their respective industry and, more specifically, their business. They make strategic decisions to stay ahead of the curve and capitalize on the opportunities that arise as the market evolves. The strategy includes:
- Investing in predictive and analytics software
- Leveraging technology
- Creating innovative products and services
If you are a commercial real estate player wondering how the market will perform in 2023 and have questions like:
Will commercial real estate find opportunities amid this financial crisis?
Will properties become more expensive than before?
Will the real estate market slow down or plunge like at the beginning of the pandemic?
This blog will help you understand the current economic and commercial real estate trends to watch in 2023. Let’s dig into the topic.
Commercial real estate 2022: A look back
Overall, 2022 was a good year for commercial real estate. Commercial real estate witnessed record funding and an increase in investments post-pandemic, but several trends now indicate that momentum may be slowing.
Taking a detour to 2022, let’s examine the real estate market’s performance.
Economic uncertainty in Q1 2022
GDP declined by 1.6% in the first quarter of the year 2022.
Due to the spike in rents and shortage of housing supply, investors showed interest in multifamily housing and apartment complexes. In Q1 2022, multifamily housing sales reached $277.2 billion.
Additionally, office space generated $114.7 billion, the industrial market generated $127.7 billion, and retail bagged $96.9 billion. Therefore, investors found opportunities for repurposing vacant properties.
Investments were up in Q2 2022
Despite the economic downturn, the size of real estate investment in the U.S. rose to $167 billion.
A study by NAR’s commercial real estate market insight showed Miami had the fastest industrial rent growth at 18.6%, followed by Columbus, Ohio, Fort Lauderdale, and Florida.
According to the JLL commercial real estate statistics report, leasing activity remained flat during the second quarter of 2022. Raising interest rates and broader economic uncertainty had slowed the office market—moreover, the rents for office spaces increased by 1.3% year-over-year on average.
CRE slowed down in Q3
As the economy struggled with rising inflation, commercial real estate growth slowed. Demand for multifamily and office space reduced compared to previous quarters.
The office sector struggled even in a hybrid work setting. On the other hand, demand for retail spaces and the industrial sector remained positive.
The net absorption rate for office spaces increased to 23.3 million sq. ft in Q3 2022. Rents for industrial spaces rose 12% and for logistics spaces 13.5% year-over-year.
Occupancy rates at hotels rose in the summer months, but remained below pre-pandemic levels.
Thrived through the fourth quarter
Despite the increase in prices and interest rates, the demand for commercial real estate remained high. The retail and industrial real estate sector showed steady growth with increased demands for space.
The housing market improved in the fourth quarter of 2022. But, the rise in economic inflation reduced the purchasing power of tenants, causing lower rents.
Commercial real estate: where is it now?
According to the outlook report, commercial real estate will have a challenging year in 2023. The retail sector, which showed steady growth in the year 2022, will be in crisis, and the future of office real estate remains unpredictable.
A spike in inflation and supply chain issues also prompted the Fed to raise interest rates. Here are some of the few takeaways from the real estate forecast,
- The multifamily sector may start to perform in 2023. The demand for industrial space shows no signs of a downtrend.
- With a month down, commercial realtors continuously need to track real estate trends and opportunities in 2023.
- Geopolitical concerns, record inflation, and an increase in interest rates may contribute to a mild to moderate recession in 2023.
- The recession of 2023 may be like a traditional one, but it may take years to recover and will affect all asset classes equally.
2023 commercial real estate trends to watch
Commercial Real Estate Investments vs. Rampant Inflation
Considering the current industry potential and performance, the commercial real estate market tops and leads the large market. However, the prevailing economic uncertainty and the recession indicate that the year’s first quarter will be challenging for commercial real estate.
Real estate companies and businesses are re-evaluating their strategies to tackle growing inflation and economic instability. Real estate investors must be cautious, especially when looking for long-term opportunities to succeed.
For investors who seek to hedge against inflation, passive commercial real estate investment can offer a better alternative since it doesn’t result in higher losses.
Inflation increases the value of commercial properties, thus providing investors protection against uncertainty in other capital markets. A typical 3-5% annual rent increase prevails to offset the rising cost of materials, labor, and services of owning commercial real estate buildings.
Established and funded players have more opportunities
While the commercial real estate market is fragmented, well-funded investors will benefit from the recession and rising interest rates in the next two decades.
With established players having access to affordable capital pools, they can stay ahead of smaller firms in the coming years. They can source funds during tough times and gain an advantage that their less fortunate counterparts don’t have.
Smaller businesses can rest until unforeseen circumstances unfold in 2023, while larger institutions and investors can fully take advantage of the current market situation and formulate their long-term investment strategies.
Multifamily real estate has a positive outlook for 2023
Traditionally, investors find multifamily real estate as a low-risk investment. The onset of the pandemic striped the real estate market, and business spurred around multifamily housing.
As a result of housing scarcity and the increasing demand for suburban homes during the pandemic, investors could continue with their investments as usual.
According to CNBC, home sales were half what they had been pre-COVID. Within the last ten years, there has been a further reduction in the supply of newly constructed housing units across U.S. markets. Moreover, the increase in house demands and rents leads to better profits and opportunities for investors.
In 2023, these factors will likely continue to drive the investment market. Nonetheless, investors with access to significant capital pools have more opportunities.
Corporate real estate will have a moderate recovery
Corporate real estate is experiencing a paradigm shift due to the hybrid work model. As corporate tenants continued to hold their workplace expansion plans due to tight monetary policy, leasing activity remained flat in 2022, except gross leasing increased by an average of 0.1%.
Most of the leases generated in previous years may expire or come to expire, which will require renewal leasing assistance.
In 2023, the office markets will continue to suffer setbacks, but demand will remain steady and moderate growth.
The leasing market will continue to boom
When all other real estate markets stay flat or show moderate performance in 2023, leasing will remain a popular market.
According to billionaire Andrew Carnegie, about 90% of millionaires remain wealthy because of their investment in real estate.
Property owners and investors find commercial leasing properties profitable as it ensures continuous monetary flow as commercial tenants prefer renting a property over buying it.
Furthermore, leasing is simple and quick. Under leasing, long-term businesses can continue at the same location by renewing the lease agreement.
Therefore, the leasing market is set to boom, making it an appealing choice. Companies that offer leasing services will continue to lead leasing projects.
Technology will become increasingly important to commercial real estate
In recent years, proptech innovations have significantly impacted real estate companies and streamlined outgoing processes.
Many firms find technology-driven solutions as a complement to their disparate systems. Real estate organizations began to function online when they faced the rapid shift and work-from-home challenges.
Nearly 58% of REITs believe their business needs technology partners to keep up with the evolving market landscape.
Technology trends in commercial real estate will act effectively and have huge repercussions on the entire market and businesses. The following are five technology trends that will determine the real estate market in 2023.
1. VR, AR, and Blockchain in real estate
2. Data analytics
3. AI/ML technologies
4. CRM application
5. PropTech platforms
The technology boom will play a significant role in enhancing the development of the real estate industry. Therefore, developing areas and their supporting businesses will significantly impact the housing market, bringing more jobs and attracting professionals.
Smart decisions will lead to opportunities for the real estate industry
Every year, commercial real estate trends and statistics change. Based on forecasts and the current situation, this recession is likely to stifle the growth of the commercial real estate industry.
To stay ahead of the curve, we continually update our real estate services to meet the evolving needs of our clients. Our services include skilled professional support and technology-driven solutions to help your business run successfully during these difficult times. Discover what we can do for you by reaching out to our team.