COVID really shook up the commercial-industrial property markets, and its effects are still rippling through every sector – retail, office, medical, public. Nobody was immune from the virus – pun intended. What’s really interesting, which we saw in 2021 and even more so in 2022, was that commercial real estate, as an industry, quickly adapted. Some sectors hurt; others thrived. Some sectors are recovering; others are pivoting in order to remain viable.
So, now that we’ve seen another NYC NYE, what does the rest of 2023 have to offer the commercial and industrial real estate markets? Let’s take a look at some trends and predictions:
2022 Commercial Real Estate Market Recap & Wrap-Up
A few trends tried to take roots in 2022 when it came to commercial and industrial properties:
- Farmland remained an attractive investment for agricultural or developmental purposes
- Industrial land and properties remained an attractive investment due to warehouse and distribution space shortages
- Commercial construction began to recover from COVID-caused supply chain disruptions
- Office spaces continued to take a hit but started to pivot to hybrid work spaces to recover
- Residential developments proliferated
- The industry saw a continued turn towards more sustainable commercial construction and industrial operations.
However, several things happened in 2022 that have made this all less of a comeback and more of a struggle; the maybe-real recession, coupled with the war in Ukraine, are sending more ripples through the CRE market, even as those ripples from COVID are still unsettled.
Commercial Real Estate Predictions for 2023 are Uncertain
The prevailing attitude about the outlook of the commercial property market in 2023 is one of uncertainty. Not only is it still in the midst of paradigm-shifting changes, but the instability of the global marketplace is an ever-looming possibility for disaster for some sectors. Each year, industry leaders and experts are gleaned for their inferences and inklings about the coming year, and predictions for 2023 are looking significantly different than those for 2022.
In 2022, 80% of global property market leaders expected revenue increases. This year, not so much. Prevalent wisdom is looking at 40% chance of revenue increase, 48% predicting a decrease, and 12% expect no change in revenue. This has caused commercial real estate firms globally to cut costs – 33% of firms are cutting costs, as opposed to the only 6% who cut costs in 2022.
The Fundamentals of the Industry are Expected to Remain Steady
When it comes to the foundational aspects of activity in the commercial-industrial real estate markets, about 66% of respondents expect good things for:
- Capital availability
- Property prices
- Vacancy leasing
- Rental rates and leasing activity
Specifically, aspects that are expected to improve include:
- Leasing activities
- Low vacancies
- Rental growth
When industry leaders account for the changes that the office and retail sectors have taken upon themselves as a result of changing industry culture, a few more possibilities emerge:
- Downtown and suburban offices (risk-adjusted) are an attractive investment opportunity, but those predictions differed by market:
- North America chose logistics and warehousing properties as their top bet for investment potential.
- Asia-Pacific markets chose digital economy properties.
- European markets pointed to suburban office spaces as their top potential rebound.
Employee Expectations will Inform Owners & Investors on How Best to Pivot
We’re in a new era of hybrid and from-home work, investors in the office sector now find themselves in an employee-led market. It’s their job to make work spaces attractive to this new way of doing work. Shifts to employee-focused interior designs and work cultures is coming to the forefront, and businesses are working with commercial tenants on leases in more of a teamwork-based way to create spaces that are conducive to the tenant’s operations.
Companies are also shifting towards acquiring and, more importantly, retaining top talent. 40% of leaders in commercial real estate are expected to bolster DE&I efforts, as well as add amenity options like work-from-home, and better health benefits and wellness services. However, less than 30% of respondents expected to do entire interior spatial retrofits and allow flexible work schedules.
The main caution here is that, it’s basically the employee version of a buyers’ market right now – low unemployment, rising wages, and companies that have already decided to pivot towards workforce-focused professional culture will by far be the most attractive opportunities to talent searching for new opportunities.
If Not Already, CRE Leaders Need to Embrace New Technology
Part of that employee experience, but also a part of DE&I as well as ESG endeavors is keeping up on the newest tech in company operations, both personal and logistical. Basically, failing to dive into the current of ever-evolving professional tech is a short-sighted decision for commercial landlords and speculative builders. And commercial real estate experts know it; 80% of respondent firms confirmed that smart contracts, tokenization and metaverse have potential to supplement and improve existing industry practices.
New technological abilities support diversity and inclusion in making work-from-home resources more equitable across a company’s workforce. These endeavors also support environmental endeavors with changes to automated and streamlined facility operations, sustainable commercial construction and intentional facility design.
Predictions by Real Estate Sector: Who’s Safe & Who’s Worried
Let’s look at a rundown of which sectors in the commercial property market are looking up in 2023 and which are staring down a struggle:
Office
Companies are likely to be disappointed by office-use rates this year; market experts expect 15% less office use going forwards, and expected new office projects will be over 25% below the 5-year average.
Owners of office spaces can offset these difficulties by investing in facility changes and procedures that make life in or out of the office better for employees. Flex workspaces, amenities and intentional, cooperation-based office design are the future in this sector and serve as an excellent – if non-traditional — avenue for even small business expansion.
Industrial/Logistics
Surprisingly, the absolute boom industrial properties saw in 2022 might fall by as much as 15% this year. That’s not to say things aren’t going well. The digital economy is constantly growing, industrial leases will still see their 13thconsecutive year of positive absorption. Vacancies will increase a bit, but are still expected to sit well below the last 10-year average.
Retail
The retail space sector is sitting at a 10-year low when it comes to vacancies, due to its pivot over the last decade to reduced new-construction projects and facility improvements as opposed to offload and acquisition of a new one. One thing the retail industry is facing is a staffing shortage, but this is also being offset by the adoption of automated customer service processes like self checkouts.
Data Centers
Data centers, industrial properties and the logistics sector are all facing a similar issue – things are almost too good right now. Demand for the massive acreage footprints needed for logistics, data, warehousing and distribution facilities eclipses land availability, which could actually cause this sector to reach an uncomfortable plateau in 2023.
Residential Developments
Multifamily residential stats will remain steady, with investors looking at low vacancies and the potential for a 4% increase in rental rates in multifamily housing. On top of that, developments of residential communities on the outskirts of urban areas are expected to continue to proliferate as more people exit urban centers for more space and room for a home office.
Hospitality
The hotel industry has had a weird few years. They were all-of-a-sudden under great need in 2020-2021 because of travel quarantines. But by late 2021 they saw a downturn as people still weren’t traveling. We saw a bit of a bounce-back in 2022 as travel opened up, and as a result, experts’ predictions for the hospitality industry are twofold:
- Per-room revenue increases are expected to rise by 5.8% in 2023.
- High insurance and utility costs will likely reduce the number of transactions in this sector.
Bringing it All Together: Commercial Real Estate Isn’t a Crystal Ball
As with any year, but it seems increasingly so after COVID, predictions are just that – predictions. And, just like in many other economic sectors, carbon emissions and minimizing environmental damage is no longer a back burner value, but an ever-increasing priority. There are hundreds of new variables to consider for businesses striving for growth in 2023’s real estate market.
However, we’re talking about industry leaders, investors, commercial brokers and lessors making these predictions, and they’ve got a pretty good idea what they’re talking about. If the last few years have showed us anything, it’s that the industry of commercial-industrial real estate can adapt – significantly, quickly and sustainably.
With the right consultants, growth strategies that carry low risks can be done, but they’re going to take extensive research, constant monitoring of market conditions, and the ability to adapt to the ever-changing environment of commercial real estate.
