2023 Commercial Real Estate Forecast

2023 Commercial Real Estate Forecast

The 2023 Commercial Real Estate Forecast is being shaped by contradicting perspectives. With rising interest rates, inflated markets, and economic uncertainty looming around every corner, there is host of signs showing that commercial real estate will struggle in the years to come. Just the same, there is an equal amount – if not – more data supporting the opposite claim.

In 2021, CRE sectors of multifamily and commercial office experienced growth of 117% and 56% respectively. 2022 has seen similar growth, but can the same be said for 2023?

2023 Commercial Real Estate Forecast Overview

There are a few key numbers that can give investors an idea of what commercial real estate might look like in 2023.

  1. Transaction Volume: While there may be growing concerns around capital markets as a whole, commercial real estate transaction volume is expected to stabilize in the years moving forward, with an estimated $800 billion in 2022, $725 billion in 2023, and $750 billion in 2024.
  2. Price Growth: Throughout 2022, ULI (Urban Land Institute) expects price growth to remain at 10%. While still positive, it’s expected to fall slightly in 2023 to the 6-7% range.
  3. Vacancy Rates: While specific rates can vary city to city, overall, the nation’s vacancy rates are expected to stay the same (around 12.3%) throughout 2022 and 2023.

Sentiment of Recession set to Stifle Growth

While the hard data mentioned above should encourage growth, the ongoing conversation and expectation of an upcoming recession may have the opposite effect. By no means is the looming economic downturn expected to match the 2008 crisis. At the very least, 2023 will still hold modest growth for the commercial real estate industry.

Recently, a panel of economists and global real estate leaders were asked about the expectations for CRE in 2023. 40% of those who were interviewed said that revenues should increase, 48% said revenues should decrease, and 12% expected no change. The survey might not shout prosperity across capital markets, but it’s a far cry from the supposed global recession promoted by others.

Optimism in the Commercial Real Estate Markets

There are two sides to every story. While there is certainly some evidence supporting the claim for a downturn, there is just as much projecting the opposite. The commercial real estate market specifically, has a number of sound fundamentals backing a positive 2023 Commercial Real Estate Forecast.

So far in 2022, we’ve seen stable or improved conditions for cost of capital, capital availability, vacancy levels, leasing activity, transaction activity, property prices, and rental rates.

As we’ll dive into next, certain areas, such as commercial offices, have seen especially promising signs in terms of vacancies, rental growth, leasing activity, and new construction.

Office – The Biggest Commercial Real Estate Trend of 2023?

The growth we’ve seen in 2022 hasn’t been equal across the board. By most statistics, multifamily stood out as the sector with the most growth, and the office sector was right behind it. Moving forward however, there are a few factors that show expedited growth for the office sector across the nation.

  1. “Return to Work”: Investors in commercial real estate are happy to see the downfall of the phrase, “work from home.” Tech and finance were two of the many industries hit hard by the work-from-home movement. However, in hopes of improving productivity and company culture, currently the companies in those sectors are pushing their employees to come back to the office.
  2. New Construction: The employees in industries like tech and finance won’t return to work without the acknowledgement certain caveats. Many are demanding better amenities and an improved work environment. This has forced the hand of many of the biggest tech and finance companies to invest in new office space in select cities. Additionally, commercial real estate sectors such as retail, are expected to grow in the anticipation of office growth.
  3. Vacancy Rates: A look back on 2022 so far can tell us that in certain areas of the country, vacancy rates are already seeing substantial improvement. This growth – or at least stability – can be expected moving forward.

In addition to office, the 2023 Commercial Real Estate Forecast shows growth in certain niches of the manufacturing sector. We all remember the supply chain concerns around semiconductor chips during the COVID-19 pandemic. While those concerns have been partially put to rest, the demand in years to come is still currently underserved.

The semiconductor chip manufacturing niche, alongside electric vehicle manufacturing, has supported legislation soon expected to pass – not to mention billions of dollars in federal grants. There is currently $33 billion in semiconductor chip manufacturing plants in the planning stage, something that presents opportunity for those in construction as well as commercial real estate. Investors are currently focused on the lucrative semiconductor opportunities in states like Arizona and Pennsylvania.

How Interest Rate Hikes Will Impact Commercial Real Estate in 2023

Concerns around interest rates make up much of the conversation around the 2023 Commercial Real Estate Forecast. As of September 2022, the Federal Reserve raised its benchmark interest rate by 0.75 percentage points. Throughout 2022, the Fed has remained consistent on its intention to enact rate hikes until the expected 4.6% benchmark of 2023. With consistent, spaced-out interest rate hikes, the Fed hopes to curb the inflation we are seeing across markets right now.

The rate hikes negatively impact the commercial real estate market in a few main ways: commercial financing, construction costs, and rent prices. While the rate hikes may suggest incoming volatility in 2023, it won’t keep investors away from commercial real estate altogether.

Certain sectors, such as multifamily housing, office, and industrial have seen incredible growth throughout 2022 and are expected to see much of the same in 2023. Turning back the clock on 2022 can help us see which cities in particular, stand out as the best commercial real estate opportunities moving forward.

If you are looking for more information on the current state of the commercial real estate market, don’t be afraid to reach out. At ICRE Investment Team, we are especially well versed in the commercial markets surrounding Phoenix, and also have access to a growing list of investment properties around the globe.