The sector of commercial real estate and the world economy as a whole has undergone substantial changes as a result of the sharp increase in interest rates and inflation in the year 2022. In 2023, it’s anticipated that interest rates and prices will level out as everyone reevaluates how to use their assets and money. Also, this year looks to be exciting. One of the most solid strategies for capital preservation in a challenging economic environment is commercial real estate. Nonetheless, the market for commercial real estate is always shifting due to the constant emergence of new trends and advances. There are a few major patterns that we’ve noticed as we think forward to 2023 and believe will have an impact on the market both now and in the years to come.
Market Review
The global commercial property market is expected to register a CAGR of over 10% during 2023. The COVID-19 pandemic has severely impacted the commercial property sector as travel restrictions, and social distancing have affected public mobility, commercial work, and gathering places.
The market segments most impacted by the epidemic include the office, hospitality, and retail sectors. Also, as pandemic measures are relaxed and market sales return to pre-pandemic levels, the worldwide market is currently in a recovery phase. The commercial real estate industry has experienced tremendous growth due to a number of causes, including urbanization, the commercial sector’s digitalization, and a rise in foreign investment.
Rethinking the Commercial and Residential Stock
Developers are urging city councils to consider converting some commercial areas to residential. This trend has been around for some time in Manhattan, New York, USA. However, this is expected to become a larger movement as commercial properties increase and residential properties continue to shrink. As the housing market suffocates due to rising mortgage rates, creating more housing opportunities could drive down home prices.
Stable Market
Commercial real estate buyers and sellers will have a more stable market in the upcoming year, which is probably going to give buyers more chances. A small rise in inventories will be present on the market. In recent years, owners and landlords have controlled buyers and tenants. The market will settle soon, I believe. These are all positive indicators of a strong, cyclical real estate market.
Buying vs. Leasing Commercial Property
Residential real estate is generally more liquid than commercial real estate. This is explained by the fact that the volume of the residential real estate market is much larger, and the average cost of an apartment is lower than the cost of commercial premises. Let’s add here several years of self-isolation when huge corporate offices were idle and empty. That is why in recent years, there has been an increased demand for commercial lease in the US, for example, instead of buying commercial real estate. Commerce is not very actively returning from online to offline, at best mastering a hybrid format of work and interaction with a client, so it will be more valid in 2023.
Investor Choice in 2023
Speaking about the trends in the world of commercial real estate, it is impossible not to mention what kind of commercial real estate is relevant in 2023. For potential investors this year, the following proposals are recommended for consideration:
- Shopping centers with permanent tenants occupying about 80% of the commercial area;
- Logistics offices;
- Warehouses;
- Stable industrial enterprises;
- Institutions related to the field of healthcare;
- Telecommunications facilities;
- Coworking centers.
Best Tenants
Owners of commercial property will try to entice renters with long-term leases. There is a strong push for long-term leases with reputable tenants in the restaurant industry, technology, or other “experience” rentals such as sizable spas and fitness facilities. Commercial property owners seek out established tenants who are willing to give up a sizable portion of their rent or offer sizable reductions to renters in exchange for long-term leases.
15 Minute Cities
People are now looking for more convenient access to services, leisure pursuits, or career opportunities nearer to their houses as a result of the pandemic’s escalating pre-COVID-19 economic strains and social inequities. So, since the pandemic, the concept of a 15-minute city—where you can complete any task in 15 minutes—has gained popularity.
US Market
The US commercial real estate market remains the largest in the world. It is expected that the increase in property prices will be most noticeable in large cities such as New York and Los Angeles, where growth is projected in the region of 5-7%.
Retail real estate
In Miami, New York, and San Francisco, 2-3% of the premises are empty; there are not enough quality offers.
Offices
Vacancy is declining, rents are rising, and yields are declining in most (72%) markets.
Warehouses
Warehouses are the most promising segment in the US commercial real estate market in 2016. One of the main risks here is the depreciation of the premises since half of such facilities in the States were built in the 1980s or earlier. The share of vacant premises in this sector is declining, rent is becoming more expensive, and profitability is declining.
European Market
Industry experts note that despite the consequences of soaring energy prices, above-average inflation, and, more lately, rising interest rates, there’s little real impact of the world’s current geopolitics on their real estate holdings. Expectations for profitability and industry confidence both declined to low levels, showing widespread industry worries across a variety of business, political, and real estate environment variables.
Growth and a solid return on investment are still possible, but the fundamentals of the deal have altered. While renting in Europe remained essentially stable in 2022, it is generally accepted that a recession will cause occupancy and rentals to decline, especially in formerly resilient industries.
Conclusion
Analyze these commercial real estate trends as you consider the years 2023 and beyond. They may very well influence the market in a way that creates chances for people who are prepared to utilize them. The key determinants of how commercial real estate will function in the coming months are inflation, rate of interest, supply chains, and geopolitical events.
