Commercial real estate is any property used only for business operations or as a workspace rather than a residence. Most often, tenants lease commercial real estate to do business. This type of real estate includes everything from modest offices to enormous standalone structures like shopping malls. Retailers, office space, hotels, strip malls, restaurants, and convenience stores are all examples of commercial real estate.
Regarding health and potential, the CRE market typically follows the lead of the larger market. However, early indications suggest that things may not be as simple for the commercial real estate outlook for 2023. Even as institutions are forced to re-evaluate their strategy and redefine success due to rampant inflation, interest rate increases, work-from-home opportunities, and continuous global economic disorder, investors will continue to be careful yet driven to succeed.
During these times when inflation is high, investors look to commercial real estate to hedge against inflation. Inflation increases the value of commercial real estate, thus providing them protection against uncertaintly in other capital markets. You will typically see a three percent (3%) annual increase or $0.50 per square foot rent increase per year, however a few leases I have personally done have had five percent (5%) annual increases to further hedge against the rising cost of of materials, labors and services of owning commercial real estate.
Institutional Players with More Funding Will Have More Opportunities
The 20-year institutionalization trend in commercial real estate, in which more prominent investment managers outperform smaller companies and affluent people, will continue as long as the market is substantially fragmented. Size might be more advantageous than ever at this time when the sector is dealing with high-interest rates and potential recessionary concerns. Large commercial real estate institutions have a bright future through 2023 because the chance to benefit from economies of scale is only expanding.
Larger institutions might have cheaper access to greater capital pools. Larger institutions benefit from the flexibility of all-cash deals and can invest during more challenging times than their smaller counterparts. They can therefore avoid paying the exorbitant interest rates that smaller institutions, who must take out loans to complete transactions, will pay. While smaller institutions may take a break until circumstances improve, these strong institutions continue to have the freedom and flexibility to move quickly on long-term investment theories.
A Positive Outlook for Multifamily Real Estate in 2023 as Strong Housing Demand Persists
Some market factors that fueled the increase in multifamily housing during the pandemic have subsided. Nevertheless, multifamily investors will be able to continue on their current track due to the persistent housing shortage and high demand for suburban homes. As of June 2022, the housing inventory was only half of the pre-Covid levels, according to CNBC. Several US markets have a significant undersupply of housing units because of the under-delivery of new housing, which has worsened over the past ten years. In addition, rents continue to rise due to high demand, providing investors with even more lucrative options.
However, several variables will make it expensive for investors to compete in this cutthroat industry. For example, construction materials continue to rise in price, pushing up developers’ complex expenses even as they negotiate a competitive labor market. In addition, supply chains prone to issues are delaying shipping and slowing down the time it takes for developers to bring freshly built structures to market.
Even while the forecast for multifamily commercial real estate in 2023 is optimistic, many possibilities will only be accessible to more prominent investors with deeper pools of capital.
The Real Estate Market Could Crash in 2023
According to Fannie Mae, the housing market is expected to calm off from the craziness of 2021 but not as quickly as purchasers would want or anticipate. According to researchers at Fannie Mae, the housing market price spike likely crested, and prices will return to normal. But, again, the time frame is the primary concern.
Top Five Threats for a Housing Market Crash in 2023
If inflation increases, consumer spending will decline, which would cause economic uncertainty, instability, and perhaps even a recession. This will undoubtedly increase the likelihood of a crash in 2023.
- Excessively high market prices Pop a bubble
Sticker shock will eventually set in and reduce shopper demand, making purchases more challenging to afford.
- A rise in Mortgage Interest Rates
The number of possible purchasers will decrease with each percentage point increase, leading to a snowball effect on prices as sellers on the sidelines rush to enter the market to take advantage of the falling prices.
In 2023, the potential reduction in economic activity brought on by a pandemic might increase. As a result, people avoid making purchases because they are anxious about moving.
- Campaigning for 2024 Election
Many people may experience a great deal of uncertainty during the pre-election year, and uncertainty is never good for the economy, especially in the property market in 2023.
Are you looking to lease office space in Phoenix? At ICRE Investment Team, we work with commercial investors, property owners, companies, banks, and commercial loan servicers seeking the highest quality of services in the greater Phoenix, Scottsdale, Mesa and Tempe Arizona regions. Contact us for more information today!