Commercial real estate market trends in 2023 are affecting how entrepreneurs invest. Here are the 14 key trends that investors and experts are keeping a close eye on.
Commercial property market trends in 2023 are flagging up potential challenges for real estate investors.
Cyclical headwinds, like rising interest rates and falling GDP, are forcing industry experts to take a long-term view of property assets. Property investors, meanwhile, are finding out that they need to keep up-to-speed with what’s happening in the ever-changing commercial real estate market.
Even investors who have been making real estate investments for a while may find these trends hard to keep up with, especially if they lack fundamental information preventing them from making decisions.
To be more specific, these common investor difficulties may include one or all of the following:
This article provides a comprehensive guide for the commercial real estate market in 2023. We’ll cover the following:
[If you’re looking for reliable funding for a commercial property investment, Duckfund provides soft deposit loans in less than 24 hours with lower interest rates than traditional loans.]
Commercial real estate is a promising investment opportunity. As a rule, investors can choose between two strategies:
Those who want to either personally manage the property or work closely with a property manager may find it beneficial to invest directly in a single piece of real estate.
Investors adopting this strategy often have a financial cushion and might be looking to take advantage of tax deductions associated with a depreciating property.
Commercial real estate provides unrivaled versatility in direct investment types, including mobile home parks of various sizes, storage facilities, industrial properties, multi-family buildings, stores, and shopping malls.
Those looking for passive income and easy portfolio diversification should consider indirect investment. Real estate investment trusts (REITs) are popular among retail investors because non-traded and publicly traded REIT stocks are accessible to those with limited financial resources.
Additionally, indirect investment enables buyers to invest in popular areas like New York and Los Angeles, even if they don’t already reside there.
There are many benefits associated with investing in commercial property this year.
Commercial real estate provides a variety of investment alternatives, including industrial and office buildings, allowing any investor to customize their portfolio to their tastes.
One of the primary benefits of investing in a commercial property is the stable stream of income investors can expect, thanks to longer lease terms. This secure income can protect the investor from financial market volatility.
Compared to buying a building outright, commercial real estate investment allows the investor to take advantage of a property’s potential rise in value at a far lower outlay because of the current low mortgage rates.
In comparison to residential real estate, commercial property offers a higher return on investment (ROI), because of the diverse investment portfolio available, longer leasing terms, and longer tenancy periods. According to Forbes real estate advisor, the average annual ROI for commercial properties over 20 years is roughly 9.5%, a considerably solid return over time.
The potential growth in the value of a commercial property is exceptional. Its value is bolstered by the income it creates, which can be raised with professional management and renting it out as the premises for certain profitable businesses.
Industry players, notably investors, should be aware of the commercial real estate market trends in 2023, as it helps them make more informed decisions.
The following are some of the most significant trends to take note of.
Like the rest of the country, the commercial real estate industry is encountering unexpected challenges, with work-from-home syndrome still one of the most pressing concerns for most CEOs. Because of the COVID-19 pandemic, hybrid work environments have become increasingly crucial in meeting the changing job requirements and the associated shift in corporate culture.
Due to these new developments, a major change in the corporate real estate sector (also known as the CRE market) has altered everything from the preferred office space style to the square feet required to house an on-site workforce.
The commercial real estate market has been revitalized by the progressive lifting of restrictions and the return to the office that followed the pandemic. Today, investors’ attention has shifted to multi-family housing and apartment buildings, which has been buoyed by new PropTech.
According to Morning Star, an online platform monitoring stock markets and economy news, multi-family market sales were at an all-time high of $277.2 billion in the first quarter of 2022, driven by rising rents, a lack of available homes and easier access to property online. Commercial real estate investors will ignore this PropTech revolution at their own peril.
Striking a balance between supply and demand is needed to maintain economic stability. Despite the growth of e-commerce in the wake of the 2020 pandemic, the global supply chain wasn’t ready to meet the sudden increase in demand, disrupting the processes that link the chain.
According to the U.S. Chamber of Commerce, because of the workforce and material shortages that accompanied the drop in supply chain work, 88% of construction contractors had difficulty finding skilled workers in the second quarter of 2021, leading to over a third of them turning down work at least once.
Vacant retail space in older buildings caused by this disruption presents a growing opportunity for leasing and repurposing.
However, it also presents a new challenge for commercial real estate investors who must make new location decisions and push back development schedules for several months due to supply chain issues.
Since there will always be a demand for reasonably priced rental units, investors see multi-family properties as a safe bet.
The slow recovery from the pandemic has hit multi-family real estate the worst, but the extent to which this is true varies widely by city, sub-market, and neighborhood. According to a report by JPMorgan, commercial multi-family real estate is predicted to do well in 2023 as the highest performing of all asset classes.
In 2021, PropTech, or property technology, was already on an upward trend, which continued strongly throughout 2022. The construction industry stands to benefit greatly from the new technologies.
Using the internet of things (IoT), for example, commercial real estate investors can provide a better experience for tenants while also increasing their profitability. Yet, despite the proven importance of technology in the wake of the pandemic, commercial real estate is lagging behind other financial markets in adopting such measures.
As a result, many commercial real estate investors looked to increase their investments or collaborations with PropTech companies last year. This trend is expected to continue in 2023, as KPMG for Financial Services reported.
The real estate industry has benefited from the PropTech revolution since it has introduced cutting-edge technology and made it easier for investors to gain the knowledge and data they need to make informed decisions. This new approach to making decisions is more efficient than the old methodology.
Concern for the environment and the desire to preserve it influences every area of modern life, including the commercial real estate market. For this reason, governments around the world pass laws to deal with the environmental, social, and governance (ESG) concerns that regulate the energy efficiency of real estate assets.
Tenants and investors in the United States, where environmental consciousness is on the rise, are less inclined to consider renting or investing in commercial real estate that isn’t energy- and resource-efficient.
Following the lifting of pandemic restrictions, people who had fled to the suburbs for safety and better living conditions began returning to the main cities.
Office property asking rents, for example, were up 1.3% year-over-year throughout the country in Q2 2022 as the economy started to recover and workers returned to the office.
The commercial real estate industry is not immune to the pervasive influence of modern technology, which has simplified everyday living. Investors in the sector have traditionally relied heavily on data to make key decisions.
Still, with the advent of new technologies, these records are at risk of being compromised by malicious ransomware, which can result in devastating financial losses. As a result, investors in commercial real estate should keep cybersecurity in mind as one of the most important developments to watch.
As information moves from one system to another and from one department to another, it is crucial that all of these transfers occur securely, for which they need robust cybersecurity measures.
After the pandemic and the subsequent increase in the need for preventive medicine research, investments in healthcare have emerged as one of the top commercial real estate trends.
The growing interest in life sciences increases the demand for commercial properties suitable for healthcare purposes.
During the pandemic, online sales boomed, causing a fall in foot traffic for traditional businesses worldwide. However, despite the huge growth in the online sales sector, businesses are increasingly embracing an omnichannel approach that combines online and offline channels.
Therefore, commercial real estate might witness increasing demand in 2023.
Inflation has become the primary fear of investors worldwide. In addition, the rising cost of constructing new buildings has reduced the number of inexpensive structures currently on the market.
Consequently, investors will seek the most practical investment to meet such situations. Commercial real estate can protect them from inflation because most commercial property sectors are built to include annual rent increases. Multi-tenant assets with a high ratio of labor and replacement costs tend to increase in value when inflation occurs.
The commercial real estate industry is seeing the effects of persistently high inflation in areas including building costs, operating expenses, rent, vacancies, and debt. Moreover, banking and trust company regulations have tightened, which has driven up interest rates and reduced CRE investors’ access to financing options.
According to The Globest, the premier online platform for CRE information, cap rates will increase by 1.0% to 2.0%, which will heavily affect the commercial real estate industry.
As a result of increased lender scrutiny and the difficulty in obtaining cash from traditional sources, like banks, commercial real estate investors are constantly on the lookout for new sources of liquidity. When faced with limited options, investors may even turn to capital recycling (disposing of assets to fund new acquisitions).
To avoid situations like this, new solutions are needed to meet these demands. The emergence of internet lending platforms has made it possible to get a loan quickly and easily, often in less than 24 hours.
DuckFund is a rapidly growing digital finance platform that aids commercial real estate investors by providing fast and inexpensive soft deposit financing, eliminating the need for personal capital.
Applying for a soft deposit through Duckfund takes less than two minutes, offers a commission of 2% (of the deposit size monthly), and requires only 24 hours of due diligence. To simplify matters, Duckfund will form a limited liability company (LLC) on approval of an application and enter into a call option agreement with the buyer in exchange for a percentage of the LLC’s membership.
The LLC then deposits the funds into an escrow account and signs the real estate purchase and sale agreement. If the buyer wants to move forward with the transaction, they will send the deposit to Duckfund in exchange for a full ownership interest in the LLC. Afterward, the buyer will become the primary party to the agreement to purchase and sell. If the purchaser reneges on the arrangement, the transaction will be called off and the deposit will be returned to Duckfund.
[Still trying to figure out where to get funds quickly and easily for a commercial property you found on the market? Duckfund offers affordable soft deposit financing for your commercial property investment with high approval rates, low-interest rates, and easy applications.]
Earnest money deposits and down payments are both important parts of closing real estate deals, but there are significant differences that investors must be aware of.
Illiquidity can be a limiting factor for commercial real estate investors in today’s market. But with the right strategies, even illiquid investors can thrive.