For the last few years, it has felt as though the future of commercial real estate (CRE) investment is uncertain. In 2020, we saw the sale or lease of many office and retail spaces that transitioned to remote operations. Last year, we watched interest rates and inflation rates increase. And through it all there has been supply chain disruption that stalled the construction of new buildings and renovation of old ones.
However, in 2023, commercial real estate prices are expected to decline, strong job growth will likely put organizations and employees in better financial positions, and investment strategists project to see a decrease in inflation rates throughout the year.
The projected economic shift will change how commercial real estate investors manage their portfolios this year. To get a better idea of how the coming months will affect your investments, let’s look at 10 commercial real estate trends for 2023.
10 Commercial Real Estate Trends to Watch in 2023
Smaller properties with shorter leases are preferred
Many organizations that previously required multiple floors of office space have transitioned to remote or hybrid work structures. As such, they now need space that can meet their flexibility requirements.
Instead of tens of thousands of square feet for offices, conference rooms, break rooms, “bullpen” space, kitchens, waiting rooms, and more, tenants now seek just enough space for the necessities. Additionally, because flexibility is key, many organizations will prefer to rent from landlords that offer short-term leasing options
Although we expect to see a brighter financial future in commercial real estate, investors will continue to seek opportunities to cut costs. Technology that automates manual processes, controls building operations (HVAC, security features, etc.), and tracks spending/income will become non-negotiables in commercial real estate investments.
Prioritizing ESG considerations
Sustainability is at the forefront of our society, permeating all sectors of business. Savvy commercial real estate investors are making it a point to consider environmental, social, and governance (ESG) when purchasing, building, and operating properties.
According to PIGM survey data, an estimated two-thirds of CRE investors and fund managers have implemented ESG criteria into their investment strategies. PIGM expects that number to increase in the coming years.
Rising interest rates and increasingly strict lending requirements have made it difficult for some investors to find financing opportunities. The H1 2022 Cap Rate Survey found that these CRE investors are concerned that tighter underwriting and lending assumptions will continue to stunt their portfolio growth.
As a result, capital recycling, or the process of using existing assets to fund new investments, has become more popular in the CRE investment industry. For investors without much liquid capital, this can be a good method of maximizing returns.
The decline of malls certainly is not a recent trend. However, it appears that CRE investors are beginning to get creative with these stagnant retail spaces housed in massive buildings. According to NAR’s 2021 Q1 survey, nearly 40% of respondents said that local malls are being repurposed into multi-use properties, including office, retail, and residential spaces.
Furthermore, a quarter of respondents said that malls would make suitable fulfillment centers or industrial spaces. As we continue to see an increase in online retail sales, especially from Amazon, cities throughout the United States will likely need these vacant malls to store goods, pack boxes, and ship orders.
The return of urban multifamily housing
During the pandemic, millions of people felt uneasy in crowded cities or simply didn’t need to live there anymore because their organizations transitioned to remote work. So, they flocked to the suburbs.
As companies return to work, public health concerns subside, and strong job growth persists, we see that workers have the desire to move back into urban areas. Investments in multifamily properties have been increasing by 56% year-over-year to reach $63 billion in Q1 of 2022, which is the strongest first quarter the sector has ever seen.
A rise in ghost kitchens
Ghost kitchens are facilities that prepare and deliver food with no intention of serving customers in-house. This was many restaurateurs’ answer to strict dining guidelines brought on by the pandemic – they can still make and serve food without the cost of hiring a staff, decorating and maintaining a restaurant, etc.
This allows commercial real estate investors to lease smaller buildings to restaurant owners because there is no need for a dining room.
More operational real estate
Operational real estate, like student housing, senior living facilities, and storage units, is growing in demand. Total CRE investing in operational real estate nearly doubled from 2020 to 2021, taking just over 12% of the Annual Global Investment Volume pie.
As a growing number of Americans need healthcare, student housing, and storage options, operational real estate will continue to be a popular and profitable sector.
A rise in digital economy properties
Digital technologies, such as cloud computing and storage, are in high demand. With businesses in every sector adopting such technologies en masse, there is a growing need for data centers that can house servers and networking equipment.
Although the current semiconductor shortage could impact the operations and new development of data centers, the United States is currently working to become a leader in microchip manufacturing. Plans to build semiconductor factories in Arizona, Ohio, and New York are already underway.
Real estate investment transactions have always required significant due diligence before closing on an asset purchase or lease agreement, but cybersecurity concerns add another layer of complexity for investors looking to protect their interests going forward.
Kaspersky found that a cybersecurity breach cost enterprises an average of $1.4 million in 2021. While this is bad news for large corporations, small businesses can be completely devastated by such an attack. Investors must prioritize the use of best-in-class security standards to protect themselves, their tenants, and their portfolios.
Commercial Real Estate in Jackson, MS
As you can see, several changes that should make their way into the commercial real estate investing market over the next year. If you’re looking to sell or buy commercial property, it’ll be worth keeping an eye on these trends to understand how they might affect your business.
Speed Commercial Real Estate is here to help first-time commercial real estate investors navigate the coming changes in the industry. Contact Speed Commercial Real Estate if you are interested in investing in commercial real estate in the Jackson, MS area.