The commercial real estate (CRE) market has experienced many disruptions in the past few years and likely has challenges ahead. Difficulties like high inflation rates, the rise of e-commerce and supply chain difficulties persist. Yet the commercial real estate forecast also includes bright spots like growth in the multifamily and industrial sectors.
Whether you’re a landlord, tenant or investor, understanding the current and upcoming commercial real estate trends is critical to your planning. Learn more about the trends for commercial real estate in 2023.
Reflecting on 2022 Trends in Commercial Real Estate
To understand the commercial real estate outlook for 2023, consider trends that shaped 2022 and may have a long-lasting effect on the market. The following 2022 trends in CRE could play into the upcoming year:
1. Multifamily Recovery
Multifamily real estate experienced substantial growth in the first half of 2022 as job growth continued and rising mortgage rates reduced the affordability of single-family homes. The National Association of Realtors noted that demand remained strong despite a decline in multifamily rent growth in the third quarter of 2022. Wage growth is necessary to support continued expansion in the sector.
2. Changes to the Office Market
As many companies allow remote or hybrid work, the office market has permanently changed. The vacancy rate for offices climbed to 12.4% in the third quarter of 2022, one of the highest in recent years. However, the market isn’t entirely in decline. Employers that provide hybrid work options and upgrade their office spaces to include more amenities may help stabilize occupancy rates.
3. Brick-and-Mortar Retail vs. E-Commerce
E-commerce has undoubtedly left its mark on the brick-and-mortar retail sector, yet retail real estate flourished in 2022. The retail vacancy rate dropped in the third quarter of 2022 compared to the previous year, and rental rates nearly doubled. Locations like outdoor shopping malls and other in-person services continue to experience customer demand.
4. Growth of Secondary Markets
2022 also saw growth in commercial real estate in secondary markets. While locations like New York City and the Dallas/Fort Worth area are still at the pinnacle of most sectors, smaller markets like Minneapolis and Atlanta picked up steam. These locations grew as people migrated to find jobs, which translated to development in secondary markets across sectors.
10 Trends Expected to Shape Commercial Real Estate in 2023
As buyers, sellers, investors and renters look to the year ahead, they can expect to see some of the 2022 trends in commercial real estate carried over and new trends emerging. While commercial real estate outlook varies by location and sector, a few movements are likely to take shape.
As we continue through the year, keep an eye on the following trends that are likely to affect commercial real estate in 2023:
1. Continued Supply Chain Challenges Driven by Geopolitical Issues
The ongoing war in Ukraine and sanctions on Russia have significantly impacted supply chains, lowering the availability of imported materials and driving up costs. The conflict will continue to impact the global economy, especially regarding the cost of construction.
Although the producer price index of construction materials decreased over 2022, the price of building materials is astonishingly high compared to pre-pandemic levels. As Russia is a major producer of aluminum and copper, prices for these materials may balloon. The cost of fuel may also increase as the war continues.
2. Further Impacts of Rising Inflation
Rising inflation has escalated costs across nearly every spending category, creating the highest inflation rates since the 1980s. Rent for a primary residence was up 8.3% in December 2022 over December 2021.
Although these high rental rates impact tenants in multifamily complexes, the rise is unlikely to significantly affect the market overall because of competition and costs for single-family homes. Inflation may also undercut earnings for investors and impact businesses in expensive areas as employees migrate to find more affordable housing.
3. Increases in Investment
Commercial real estate investment remains relatively strong despite the uncertainties plaguing the market. Global commercial real estate investment volume fell in the third quarter of 2022, but volume is expected to stabilize by the end of 2023. Investment is still likely to exceed pre-pandemic levels.
Investors may be particularly drawn to the multifamily market, as a shortage of single-family homes and high inflation keeps families in the rental market.
4. Peaking Interest Rates
Interest rates are another important metric to track going into 2023. The 30-year fixed mortgage rate rose steadily over 2022, but experts disagree on whether interest will stagnate or continue increasing this year. Mortgage experts and economists predict that 30-year, fixed-rate mortgage rates will peak between 5.2% to 7% in 2023. However, several unexpected events could occur this year, including a recession, to push rates down again.
5. Industrial and Warehousing Boom
One of the most significant commercial real estate trends for 2023 is a boom in the industrial and warehousing sector. The rise of e-commerce has led to a greater need for manufacturing and warehousing space. Industrial real estate vacancy rates were 4% in the third quarter of 2022, the lowest for any sector. That trend will likely grow this year.
In addition, investments in innovations like final-mile distribution centers will likely increase to get products into customers’ hands faster and bypass supply chain challenges.
6. Retail Evolves
The retail sector will continue to experience significant changes in 2023. At the end of 2022, e-commerce only accounted for 14.8% of all retail sales. However, many neighborhood shopping centers and retail centers that adjust to the changes will continue to perform well.
Retail businesses may invest in an omnichannel sales approach and create a unique experience at their locations to appeal to shoppers and entice foot traffic.
7. Multifamily Leads the Surge
The multifamily market is at the head of commercial real estate growth going into 2023. Many potential homeowners are renewing their leases in response to higher interest rates, meaning landlords and investors will continue to see stability. Most multifamily properties can also adjust rents annually to accommodate changing rates.
8. The Future of Offices
The office sector has seen significant disruptions in the past few years, with more employees working remotely than ever. Yet 55% of companies are using a hybrid model going into 2023.
Employee preference for remote work, or at the least increased flexibility, will motivate companies to reexamine the office space they need. Many businesses will likely consider increasing their on-site amenities, optimizing floorplans and providing outdoor spaces for workers.
9. Secondary Markets Flourish
Although cities like New York and Los Angeles haven’t seen a mass exodus, new cities are emerging as the top commercial real estate markets. Job availability, rental rates and even climate will influence workers to move and, in turn, create new retail, office and industrial opportunities.
These cities are some of the top secondary markets to watch in 2023:
- Nashville, Tennessee
- Dallas/Fort Worth, Texas
- Atlanta, Georgia
- Tampa/St. Petersburg, Florida
- Raleigh/Durham, North Carolina
10. Increase in “Green Building”
In the summer of 2022, the federal government passed the Inflation Reduction Act, which contains several incentives for investment in environmentally friendly building projects. The new tax credits for “green building” may be a way for businesses to regain control over the cost of construction. Green building development may also attract certain companies looking to entice their employees back into the workplace.
Learn More About Commercial Real Estate Industry Trends From Zommick McMahon Commerical Real Estate
Despite the challenges ahead in specific sectors, many investors, landlords and tenants have an optimistic view about the year ahead. Plateauing inflation rates and growth in the multifamily and industrial sectors are particularly encouraging. With innovation emerging in the retail and office sectors, 2023 could usher in changes that benefit landlords and tenants and boost investment.
Whether your interest is in buying, selling or leasing commercial real estate, Zommick McMahon can help. Our expert real estate brokers offer many services tailored to your business needs, from landlord representation and tenant representation to investment services. Since our founding in 1949, our firm has built the expertise and connections to help us find the right deal for you.
For more information about our services and how we can help you achieve your goals, contact Zommick McMahon.