2023 CRE Outlook and Opportunities

Experts are currently predicting a strong possibility of the U.S. falling into a recession in 2023, contributed by an unprecedented year of rate hikes mixed with global economic weaknesses. This, combined with record-low consumer confidence, is slowing down U.S. economic output. However, looking at the long-term view, experts do not believe that now is the time to panic.

Interest Rates Impact on CRE

Though several other factors contribute to a recession, interest rates are at the core. Inflation did begin to decline in late 2022; however, it was still above seven percent. The continuation of high-interest rates will make 2023 a challenging year for commercial real estate. The Fed will keep raising rates unless it notices a visible drop in inflation that brings it closer to its two percent target.

However, don’t write off 2023 just yet. Experts believe the base case for the likely downturn is relatively mild. The market for skilled labor is competitive and corporate finances are strong, meaning firms will try to resist large-scale layoffs for as long as possible. However, the tech industry has seen a string of layoffs as consumers pull back on spending. Additionally, the trends indicate that inflation will significantly fall by the second half of 2023, opening the door for declining interest rates and thus launching a new cycle that will last into the 2030s. This is encouraging news for those worried about even more elevated interest rates for the new year.

Market Sectors 2023 Outlook

The sectors that will likely be the most resilient in the looming 2023 recession include data centers, industrial, retail, and hospitality. Experts have also predicted that the multifamily industry will gain from the ongoing housing crisis.

Owners and investors are focusing on logistics and digital economy facilities. The increasing popularity of hybrid working is a key force currently driving this digital era. Hybrid working has several advantages for employers and employees but will ultimately decrease office demand, forcing companies and investors in the office sector to make some changes.

Experts are predicting that supply chain disruptions are here to stay in 2023. These issues are causing commercial real estate to experience inflationary trends across all segments, especially in the industrial sector. According to logistics experts, over the next five years, there will be an increase in demand for high-quality industrial warehouse and distribution space across the United States due to this inflationary trend and the growing tendency
to move more production to North America. Costs, including those for energy, shipping, and raw materials, are rising. In spite of the fact that many renters have already signed leases, landlords and tenants are having trouble getting the materials they need to finish in-demand projects.

Throughout several economic challenges, the retail sector has remained resilient. As the economy begins to stabilize, retailers are anticipated to keep sourcing space to be in a position to meet their expansion objectives. Retail tenants should also expect high rental rates to continue. New space availability will probably be concentrated in unanchored shopping centers and more likely to be found in single- and multi-tenant structures on smaller plots.

The hotel industry will continue to recover from pandemic limitations. Hospitality’s resilience is unmatched, and as consumers shift budgets, some will continue to prioritize travel, especially in major markets. Real estate companies across the nation are looking for outsourcing prospects to help optimize operational capacities. There is also persisting interest in utilizing proptech to help offer cutting- edge complementary services.

Unemployment

The Fed’s watchful eye on the labor market may determine whether or not they choose to raise rates to balance out inflation and unemployment for the year. In addition, the ratio of total job vacancies to the number of unemployed workers is expected to be less than 1 in 2023.

Major Trends

Despite feeble consumer confidence, the average household debt is tolerable compared to the beginning of previous recessions, indicating that 2023 should only experience a modest recession.

Due to the continued scarcity, high cost of capital, and the anticipated near-complete closure of the high-yield primary credit markets, the capital markets will likely remain unstable in 2023. However, after a turbulent 2022, inflation may have peaked, employment is still solid, and there is a higher likelihood that the Fed will orchestrate a
smooth landing.

In 2023, it is anticipated that the bid-ask spread will dramatically decrease as sellers become more realistic about the worth of their assets in the face of persistently high-interest rates. According to GlobeSt, the average cap rate for all properties will grow to 7.0 percent from 5.5 percent as the Fed raises short-term interest rates, and cap rates for CRE acquisitions will rise in tandem with this trend.

According to PWC, niche assets and real estate market segments, which some interviewees anticipate doing better than core property kinds, are additional chances to optimize portfolios. Self- storage, data centers, dorms for students, and facilities for life sciences are some of the important opportunities mentioned this year. While many of these specialized markets exhibit solid fundamentals and present alluring potential for income generation, they do raise issues with liquidity and complexity.

Markets to Watch

Several aspects of the commercial real estate industry are normalizing and reverting to pre-COVID trends; however, others have sustained a new normal as the pandemic left permanent changes. Some patterns appear to have been reinforced by the pandemic, most notably the domination of “Magnet” markets, many of which are located in the warmer Sunbelt regions.