Should I Invest in Commercial Real Estate In 2023?
March 15, 2023
The commercial real estate market outlook indicates that there could be a few bumps in the road in 2023. There is a lot of uncertainty about the future of office while retail remains at a crossroads. That said, inflation is close to a 40-year high, there are supply chain issues, and the Fed is increasing interest rates.
However, there is light at the end of the tunnel and similarly, we can see a few bright spots in the commercial real estate sector. Multifamily properties continue to perform well and the demand for industrial properties remains strong. We take you through the verticals you should watch out for this year before you invest in commercial real estate.
Industrial Sector Commercial Real Estate Investing Trends
With the growth of e-commerce, there is a need to get products into the hands of consumers at the earliest and this has led to a growing demand for industrial spaces and warehouses. Today, e-commerce accounts for less than 30% of retail sales which means there is a lot of room to grow.
The commercial real estate industry is delivering a record number of new warehouses but whether the industrial performance metrics fare or not will also rely on the demand and supply mix. The industrial sector which includes self-storage, industrial warehouses, and RV storage could face challenges in the form of longer leases that account for about 2% to 3% of inflation. According to Wall Street analysts, there could be a recessionary environment in storage assets this year. They also believe that industrial warehouses, self-storage, and RV storage could be solid assets to invest in 2023.
Retail Sector Commercial Real Estate Investing Trends
When it comes to retail, the forecast will generally depend on the retail category and location. For example, some people want to shop at a grocery store for specific items, grab a coffee or get their nails done. Residential areas with neighborhood shopping centers often perform well.
Having tried to revive the B and C-class malls for the purpose of sales tax in the past, several cities are not redeveloping these spaces anymore. It does not mean that the sales tax will be totally lost, as buildings are now being converted to mixed-use properties which include apartments in addition to movie theaters, restaurants, and experiential retail spaces. Retail has been slow to pick up in city centers while retail in urban areas boasts of high rent levels as compared to other retail, but it continues to be weighed down due to less number of people working in offices.
Office Sector Commercial Real Estate Investing Trends
The investors in Class A office space will be losing the most this year. There was a time when the Downtown office space used to be highly coveted and in California, there is about a 30% vacancy rate today while in the city, there are 1,300 leases of class A and B office space set to expire. This will cause some pain in the near term. But the right location with adequate amenities like optimized floor plans for collaboration, onsite services like catering or childcare, and private outdoor spaces could convince employees to return to the office. It can give a boost to CRE Investing in the latter part of the year.
Investing in commercial real estate is always going to pay off but it is important to focus on the right location and the right type of asset you put your money in. If you do not want to take the risk of putting your money into one property, CRE Income Fund could be a great option.