Commercial Real Estate Investors can expect changing markets in private equity throughout the rest of 2023. Those looking to pursue investments in commercial real estate can certainly find opportunity, but only after navigating rising interest rates, record setting inflation, and a volatile market sentiment.
Most economists expect a slow and continued recession for both commercial and residential properties throughout the next year. With that being said, there are a few private equity trends that investors will still want to keep in mind.
Commercial Real Estate Investors Outlook
According to 2022’s market data, analysts are reporting the commercial real estate market isn’t likely to make a full recovery for multiple years. While certain sectors may pull through sooner, rising geopolitical tensions overseas combined with our current economic problems in the states have many investors holding their wallets.
Current Market Data
- U.S. Inflation Rate – 7.75% as of Q4 of 2022
- Rent was up nearly 8% in Q4 of 2022 (after rising 7% in the year prior)
- 2023 target federal funds range – 3.75% to 4%
- GDP up 1.1% as of Q1 of 2023
- Personal consumption expenditures (PCE) are up 12.7% in 2023
Office space perhaps has the bleakest outlook in 2023, with the end of Q1 marking a 66% year-over-year drop in demand. The first quarter of 2023 only produced $6.5 billion in total office sales, a drop in the bucket compared to market norms. It’s estimated that 117.5 million square feet of office space is currently under construction, only 6.1 million of which went underway this year. Current national office vacancy rate stands at 16.7%, with cities like Denver recording rates as high as 20%.
The retail market has been viewed as being on the verge of collapse for as long as e-commerce has been around. With that being said, 2022 market data showed some promising signs: decreased vacancies, increased rents, and more brick and mortar stores opening than closing. Consumer spending will always be the biggest variable with office space, but many investors are finding attractive demand in luxury retail, entertainment, and niche shopping businesses.
The industrial sector has struggled alongside retail and office, but is backed by a growing e-commerce demand. As the e-commerce space continues to expand, so does the need for modern warehouses and industrial properties. For this reason, economists believe the industrial sector may fare better than others in the looming recession.
Multifamily Real Estate Investors
Multifamily is the best performing asset class in commercial real estate so far in 2023 with vacancies at a five-year low (4.4%). Those in the multifamily space have had to face rising costs like everyone else, but have been able to adjust rents quickly, allowing them to adapt to market changes.
Private Equity Markets in 2023
How is the current state of private capital markets? Investors in private equity have been riding strong fundamentals since Covid-19, but may be facing a shift in momentum in 2023. Those in private equity will now battle uncertainty across asset classes – after having survived a 22% decline in PE deal volume in the second half of 2022.
Current Private Equity Data
- Assets under management (AUM) in the private market totaled $11.7 trillion in 2022
- Dry powder exceeds $3 trillion (8.4% year-over-year growth)
- Global PE performance: -9% return (first negative return since 2008)
Changing market conditions and trends can be expected. Currently, public-to-private deals and carve-out options are a popular vehicle in PE, as they hedge against falling market valuations and the shifting of corporate portfolios.
Other trends in private equity include the following:
- Minority deals, as they don’t normally require refinancing
- All-equity deals
- Private placement of debt, which will help investors bypass syndicated markets
- Diversity – not just in asset classes but also deal structure
- Prioritization of funds over $5 billion
Commercial Real Estate – A Private Equity Hedge in 2023?
While the majority of investors will cushion their losses through diversity, as far as hedges go, there seems to be a primary focus on one asset class in particular. Real estate has long held the place amongst investors of protecting real value in periods of high inflation. In fact, real estate performance has outpaced inflation during six of the last seven inflationary periods.
So long as cap rate compression holds during times of inflation, investors will prioritize real estate as a hedge. Even amongst rising US treasury rates and current market tensions, many analysts expect real estate to be a mainstay for private equity in 2023 and beyond.
More About 2023’s Commercial Real Estate Markets
Are you looking for more information on the current state of commercial real estate? At ICRE Investment Team, our professionals have access to the most up-to-date market data and opportunities. Feel free to reach out any time for more information on 2023’s commercial real estate market.