Commercial real estate (CRE) saw success through the second half of 2022. Even though the market took a severe hit by COVID in 2020, it came back to life in 2021 with a record $809 billion in sales.
However, with the current high inflation and rising interest rates, a potential recession is the first thing on the agenda for the CRE market in 2023. This would mean a significant reduction in new investment capital flowing into CRE due to the higher cost of borrowing capital and construction materials. Therefore, for future investors looking to enter the market, it’s an excellent opportunity to purchase real estate amidst lowering prices.
Regardless of possible macroeconomic outcomes for 2023, certain assets in the CRE sector have performed solidly through 2022, such as the industrial real estate sector, multifamily properties, and medical office buildings.
The current, most pressing issue in CRE is the struggle in the workspace sector as new work dynamics, such as remote work and hybrid formats, continue to develop.
Still, actionable work can be done in existing buildings, such as adapting and retrofitting to approach ESG standards increasingly expected in properties. This will attract new and younger tenants, especially from the Gen Z generation.
In this article, we’ll investigate trends in CRE that demonstrate the industry is moving towards a sustainable future with genuine ecological enhancement.
What does a recession mean for commercial real estate?
A recession profoundly affects every aspect of the economy, especially the prices of properties. More people are pushed to rent rather than buy property since income and employment levels go down.
However, with enough liquidity during a recession, the market becomes favorable to buy on account of prices going down, but it will also be harder to qualify for a mortgage.
So are we actually in a recession? According to Morrison Foerster’s 44th Economic/Real Estate Poll, 68% of respondents in the US believe the country is already in a recession or will be in one by the end of 2022.
What to look for when investing during a recession
Suppose you are looking to invest in 2023 under the risk of a recession. In that case, you should consider multifamily properties and the industrial sector, which we will discuss in more detail, which include retail and businesses that offer in-person services, such as grocery stores, salons, and fast-casual restaurants.
According to Market Watch, these properties are the most affordable since 1985 due to rent growth decelerating. As a result, people are forced to rent for longer rather than buy property, which explains the need for renting multifamily complexes.
Still, despite the general low purchasing power, multifamily sales have remained strong in 2022, totaling 320 billion, according to a study by Cushman & Wakefield.
Office buildings struggle amidst remote work balance
The current conditions in CRE show the office space sector as the most underperforming asset class. Since the pandemic, the workplace has become outdated and unappealing due to new work habits that allow working from home to hybrid modules.
NAR research shows that demand for office space significantly decreased in 2022, and vacancy levels in the workspace have been the highest across all sectors in commercial real estate.
To remain ahead of the market, here are some trends happening in commercial real estate that business leaders should be aware of:
Do not ignore tendencies that could shake up the market
Staying ahead of global trends and macroeconomic cycles is vital for making moves. According to property management experts at Maddox Companies, the CRE life cycle divides into four phases: recovery, expansion, hyper supply, and recession.
In times of economic downturn, there are always pockets of opportunity and growth to be seized. A long-term grasp of previous and current development patterns will encourage better-informed and bolder decisions from companies and investors as to whether it is beneficial to acquire, sell or hold on to an asset.
ESG-related real estate activities are still a top priority
The regulatory environment keeps advancing on issues of ESG (Environmental, Social, and Governance).
ESG topics such as greenhouse gas emissions, climate risk management processes, and oversight of climate-related risks are globally expected to continuously get more transparent.
Most firms want direction on how to implement changes and follow the results of ESG regulation. However, according to Deloitte numbers, only 12% of the industry surveyed is ready to respond to regulatory action in the short run.
Adding tech to commercial real estate will help you in the long run
Delving into tech can give you a significant advantage in the commercial real estate market. For example, IoT (Internet of Things) is a technology that surpasses traditional automation and has a lot more to offer, especially in smart buildings.
Many firms are attempting to incorporate IoT data sources into property operations to have better control over building conditions, make a building’s energy consumption more sustainable and reduce greenhouse gas emissions (GHGs).
Commercial real estate management: Buy, sell or hold?
Property owners should consider selling an asset during economic growth, not during a recession. During expansionary periods, real estate prices often rise, and the market is powerful. If you are financially sound to hold on to your assets, do not sell for liquidity you don’t need.
If you want to make a purchase, we recommend you do so during a recession, when prices tend to go down. However, getting your purchase financed could be more challenging during a downturn.
In 2023, here are tactics you can use to protect and grow your commercial real estate investments:
Existing commercial real estate assets can be worked on
If you own a relatively old building, it doesn’t mean it must stay like that forever. Sometimes, you can make some changes and not have to start all over again. Owners should consider a ‘refurbish and reuse’ policy rather than ‘demolish and rebuild.’
Any building brought up to more sustainable ESG standards frequently benefits owners and renters immediately and in the long run. Also, tenants can provide valuable feedback on the best property features.
As for other existing properties that can be worked on, struggling malls in less populated areas are perfect candidates for re-usage and re-shaping. Their proximity to parking lots is beneficial for new housing development. In addition, their clear heights make them compatible with industrial use, serving perfectly for warehouses.
As for building on ESG standards, Stevens & Bolton suggests switching to LED lighting and adding solar panels to reduce a building’s overall emissions.
The evolution of retail
Transferring a physical retail store to an online service and making online inventory sales is a good move, saving rent costs on a storefront or warehouse.
However, despite e-commerce’s massive growth since the pandemic, JP Morgan’s research indicates brick-and-mortar retail will remain relevant in the foreseeable future because they look to provide “unique” experiences for customers in physical stores. So, well-located physical and online stores will likely hold up in the coming years.
It’s not too early for smart contracts and tokenizing in real estate
Do not regard emerging technologies like smart contracts, tokenization, and the metaverse as fads. They might be here to stay.
According to data from Deloitte, more than 80% of respondent firms are spending dollars in implementing these technologies. So, in the long run, CRE firms not cutting back on technology might unlock uncharted potential and get ahead in the market.
What lies ahead: Housing prices might fall in 2023, but affordability continues to decrease.
Although the commercial real estate industry faces an uphill battle against a looming recession, several opportunities exist for investors to fortify their portfolios against market downturns.
- The potential 2023 recession indicates favorable conditions for new investment opportunities in CRE. However, awareness of macroeconomic cycles and trends will be critical for surviving the downturn.
- The goods-related industrial sector continues to have positive sentiment across the four asset classes (office space, industrial, multifamily rentals, and retail) and probably will remain that way. Performance-wise, there’s also optimism for the multifamily sector so far.
- Asset owners planning on selling should wait for a market correction by the mid-2020s. If you do not have any specific reason to sell right now, it will be better to wait and ride out the storm we’re facing.
- ESG disclosure must be prioritized. Socially responsible ESG policies can build trust, attract and retain employees and tenants, and meet community needs while taking a more sustainable approach to living.
- Understanding and responding to change through adjusting is the path to follow. CRE firms should consider tenants, investors, and regulators’ evolving needs.
Want to learn more strategies for managing your commercial real estate investments? Contact us to speak to one of our expert real estate consultants.