Navigating Rough Waters Ahead: A Look at Commercial Real Estate Trends

The commercial real estate market, which is currently worth nearly $21 trillion, is facing a number of challenges that could lead to serious consequences. The pandemic has heavily affected many brick and mortar businesses around  the world, from decreased revenues to a greater emphasis on virtual stores to even shutting down many businesses completely. Unsurprisingly, the struggle of many businesses has directly impacted the current trends happening within the commercial real estate market. 

Shifts in Office Space

Office space leasing in particular is suffering post-pandemic. One of the biggest challenges is the rise in office vacancies, which has been particularly noticeable in San Francisco, where the vacancy rate has risen from 6% to 15% since before the pandemic. Another issue facing the market is the fact that employees are spending 25-35% less time in the office than they did before the pandemic, which has resulted in a decrease in office space demand per employee.

New York’s commercial real estate market is an example of a location where the office real estate market is heavily struggling. Layoffs in businesses have greatly reduced the  demand for commercial real estate. Office occupancies in the city have been flattening at a post-pandemic high of 47%. Sales of New York City real estate could drop 15.9% from 2022 to 2023, potentially reaching $101 billion.

In addition to these problems, the market is facing the reality that cheap money is no longer available, with an estimated $450 billion of loans due in each of the next four years. Interest rates have risen by 7% in 2022 alone, which has also led to a decline in property prices, with office prices dropping by 17.5%. There are predictions that prices could drop further by 20-30% and may take some time to recover.

Economic Uncertainty

These multiple factors are impacting commercial real estate investment decisions by creating market uncertainty and shifting investment priorities. Many investors are currently pausing investments and waiting for the market to correct, but the US is still considered a stable market with good growth prospects. The market is waiting to see if there will be opportunities in as soon as six months or if it will take up to a year.

Many institutional investors know that commercial real estate is still a strong investment. There are still opportunities in the commercial real estate market for those willing to take risks. Data centers and industrial real estate are expected to be the most resilient in the coming year, while the hotel sector is likely to continue recovering from pandemic restrictions. Office occupancy may also see a 10% jump as employers demand workers return to their desks, although this may not happen evenly across the market.

Viable Commercial Real Estate Options

Office space leasing is not the only profitable type of commercial real estate. There are a vast number of other types of commercial real estate, ranging from public to private use. Retail is an example of a different type of commercial real estate that investors can consider. It includes general purpose shopping centers, with an assortment of clothing stores and restaurants. Power centers and community retail centers are also considered retail commercial real estate. Multifamily properties such as duplexes, triplexes, quadplexes, garden apartments, mid-rise apartments, and high-rise apartments are also options for investors. 

Other examples include industrial properties that are used as manufacturing, distribution, and/or logistics facilities. These facilities are categorized as light assembly, flex warehouse, and bulk warehouse. Hotel and hospitality properties include both full and limited service hotels, ranging from resort-style amenities to just a simple fitness room. Extended stay properties are designed with even more amenities that can support a full living situation. Special purpose buildings, including stadiums, student housing, and movie theaters are an option for investors as well. Lastly, commercial real estate investors may even consider land, including agricultural land, infill land, and brownfield land. 

In Conclusion

In terms of trends for 2023, investors may consider value-add, opportunistic, and core properties, with the strongest preference for value-add properties. Industrial, multifamily and single-family rentals, self-storage, and data centers are all expected to continue attracting interest. For example, industrial space is in demand due to supply-demand imbalances. While the market is currently facing significant challenges, there are still opportunities for those willing to take risks and invest in resilient sectors.