Expectations for the 2023 Commercial Real Estate Market
Summary: The commercial real estate market saw many changes in 2022. Here’s what’s forecasted for 2023:
1. E-Commerce Will Drive Industrial Space Development
2. Multifamily Properties Will Be the Biggest Winners
3. Retail Buildings May Be Repurposed
4. Green Development Will Come to the Forefront
5. The Pandemic Will Still Affect Office Rentals
E-Commerce Will Drive Industrial Space Development
In the midst of a tight market, e-commerce has become crucial for consumers shopping across all categories. Because of this demand, manufacturers need more space to hold their inventory and logistics companies need more hubs from which they can send products. According to JP Morgan, e-commerce will drive the need for more warehouses and distribution centers, which is forecasted to continue for at least another decade. Rental rates for industrial spaces are also expected to increase year over year, with Class A and new construction properties expected to experience a much higher rent hike rate.
Multifamily Properties Will Be the Biggest Winners
Multifamily properties experienced a boom during the pandemic and continued to thrive throughout record inflation in 2022. In 2023, these types of properties are expected to be the winners in the commercial real estate market. Although the market has changed since the pre-pandemic period, many of the conditions that fueled that growth are still in play.
Overall, housing inventory remains at half of what it was pre-pandemic, driving demand for rental units. What’s more, rising prices of building materials have caused underdevelopment of new homes. The resultant soaring home prices will continue to propel families to rent, keeping the multifamily industries in an advantageous position this year. Though multifamily property owners face cost increases due to across-the-board inflation, being able to adjust their rental prices provides a buffer against unpredictable market conditions.
Retail Buildings May Be Repurposed
Online shopping posed formidable competition for brick-and-mortar retail centers pre-pandemic, and the nationwide quarantine only made this more apparent. While grocery stores, coffee shops, and neighborhood retail spaces continue to thrive, others such as malls and city centers continue to lag. Concern over a lack of balance between residential and commercial buildings has also necessitated a new paradigm on the best use of certain types of properties, and some developers will turn to repurposing or retrofitting existing real estate. For example, excess retail space may be converted into mixed use buildings (i.e., retail and residential), and older office buildings may be used for multifamily units or may be upgraded to be more modern. Another possibility is that older buildings may be razed, with new developments built in their place.
Green Development Will Come to the Forefront
In August, Congress passed the Inflation Reduction Act, a bill focused on climate change. One provision provides funding based on property improvements that drive energy efficiency. Since energy rates have also risen with inflation, saving money on energy expenditures has become a major focus for commercial real estate, particularly with multifamily properties. Under this act, owners can more easily add improvements – such as electric vehicle charging stations and high-efficiency HVAC systems – to their properties. Because of the bill’s various tax credits and grant programs, property owners will not only be able to make their properties more efficient, but also more attractive to renters concerned about climate change and sustainability.
Outside of multifamily properties, there will be more focus on green development and redevelopment by adding features such as walking paths and green spaces, and even choosing areas that are more walkable for new development projects.
The Pandemic Will Still Affect Office Rentals
Almost three years into the pandemic, many companies are still allowing their employees to work from home. This remote work culture is expected to continue to have a negative effect on office space. In addition to the changing landscape that many companies have adopted, interest rate hikes have made it more difficult for commercial property owners to get mortgages and other loans.
The bright side of the changing office landscape is that the number of hybrid workplaces is expected to increase. In 2023, some experts predict that innovation in office development and design will drive more employers to bring workers back into the office.