The Fate of Private Commercial Real Estate in 2021 (Updated for 2023)
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
This article was updated on 7/20/2023.
The long-lasting effects of the COVID-19 pandemic are starting to take shape in the commercial real estate market, giving us more insight into its near future. Some CRE sectors have recently started to flourish, while others have remained stagnant.
Overall, the outlook for private commercial real estate in 2023 is a mixed-bag: Many sectors are gaining traction and showing no signs of slowing down, while others are clearly floundering. Some of this year's winning sectors include industrial and logistics, alternative sectors, and multifamily housing.
Winning Sectors
There are several sectors across the United States that are seeing a lot of opportunities for growth in the private commercial real estate industry, including and especially industrial real estate and multifamily housing.
#1 – Industrial and Logistics
With the rise of remote work and "corporate nomad" culture, the demand for operations and logistics support is high as the workplace continues to decentralize. Production, manufacturing, and distribution form the backbone of many companies and require flexible, cloud-based travel and expense management solutions.
There's also strong demand for warehousing space, creating opportunity for private real estate developers and investors.
#2 – Multifamily Housing
Many urbanites have moved out of their big cities and into the suburbs or other areas where the cost of living is not quite as high, such as the Sun Belt regions, but these newly desired areas rich in multifamily housing are filling up fast.
Where population grows, so does the need for affordable housing. This creates unique opportunities for developers to meet the needs of singles and families in need of such housing.
#3 – Alternative Sectors
Alternative sectors cover special-purpose real estate, or anything that is not a “traditional asset." This includes healthcare facilities, storage facilities, and more.
Because of the pandemic, these sectors are thriving. For example, prospective homebuyers who are still being squeezed out of the market are remaining renters, boosting demand for self-storage, and healthcare facilities are seeing more business thanks to this new pandemic-induced sense of health consciousness. Investors can use this information to make equitable, valuable purchases.
Losing Sectors
Some of the losing sectors in today's commercial real estate market include the following.
#1 – Hotels
Simply put, people are not traveling as much as they used to. Because of the pandemic, the hospitality and tourism sectors have taken a nosedive. When we first entered the global pandemic, travel restrictions were put in place stating that people could only travel if and when absolutely necessary.
The silver lining to this is that the tourism industry is expected to reach pre-pandemic levels again in 2023. Time will tell if this truly happens, though, as inflation and higher housing costs squeeze consumer wallets.
#2 – Retail
Retailers are facing significant challenges in the current inflationary environment we find ourselves in. With shoppers facing drops in disposable income and the increasing popularity of online shopping, retail companies are hesitant about expanding or leasing new retail spaces.
Even before the pandemic hit, large department stores, like JCPenney and Sears, were struggling to stand up against online shopping trends. And with nearly 218 million people predicted to shop online in 2023, it should come as no surprise that retail commercial real estate is not a winning sector.
#3 – Office Space
Many companies are downsizing or moving to either hybrid or permanent remote work. The demand for new office space is decreasing and the sector continues to remain in distress thanks to tighter monetary policy and the aforementioned work-from-home trend, making it one of our losing sectors in 2023.
Even with some people returning to the office space for work, the irreversible shift towards remote work has dramatically altered the way most businesses look at expense management: Many are finding it increasingly difficult to justify office space rent.
Inflation Forecasts
According to experts, higher inflation is here for the long haul. Between 2021 and 2023, the inflation rate is expected to increase annually by an average of 2.58%, bringing it to levels not seen since the early 90s.
This inflation forecast may be negatively affecting the attractiveness of commercial real estate today; however, the multifamily housing, student housing, and storage sectors can still provide investors with attractive short-term lease opportunities.
Inflation becomes even harder to predict when you're transitioning to a post-pandemic economy. But the opportunities in private commercial real estate aren't washed up just yet.
Predictions for the Rest of 2023
The Federal Reserve has been raising interest rates at an alarmingly fast pace. Financing commercial real estate becomes more difficult as a result, and recent bank turmoil calls financial security concerns into question, both of which have direct and indirect ramifications on the commercial real estate sector.
Here's what we're seeing for the rest of 2023:
- People will continue working from home: This means that there may never be as high a demand for office space as there was before the pandemic. Businesses are changing the way they use the physical office and this will continue to affect the commercial real estate industry.
- Interest rates will remain high: The Federal Reserve is forecasted to continue raising interest rates this year after pausing rate hates in June.
- Major cities will continue to see population declines: Cities like New York, Los Angeles, and Chicago have seen higher population declines since the onset of COVID-19. People are seeking the suburbs to find better housing opportunities and lower costs of living.
These are just a few of the predictions that we expect to see for the rest of 2023.
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