The year 2023 was viewed as potentially a challenging one for the commercial real estate industry, with the combination of market volatility, high inflation and interest rate hikes. Not to mention, the latter half of 2022 brought instability to the U.S. economy, causing hesitation and anxiety in consumers and investors. With the rise in real estate prices and the prospects of another looming recession, investors were ambivalent when it comes to investing in commercial real estate. The ULI Real Estate Economic Forecast predicted that America’s 2023 commercial real estate transaction volume would be $735 billion, down $65 billion from 2022. Given the leery state of the U.S. economy, here are four important trends that investors are watching closely for 2023:
Rising interest rates: As interest rates continue to climb, it could trigger a recession, making debt costlier and borrowing harder — for both consumers and businesses. With the rise in inflation, the debt market has shifted considerably, and interest rates are now well above 6.00%, making it something to continue to watch in 2023.
Inflation: The commercial real estate industry serves as a hedge when it comes to inflation, as values typically rise at the same rate of inflation. However, other values are affected by inflation, including supply and demand, operating expenses, rent, vacancy, materials and labor costs, putting a strain on commercial real estate.
Cap rates/property values: Capitalization rates for commercial real estate values will continue to struggle to match up with higher borrowing costs. The recent spike in interest rates, combined with high borrowing rates, have forced up cap rates and caused property values to adjust downward. It is important to watch if property values dip with the instability of the economy and debt market that happened in the latter half of 2022.
Looming Recession Fears: Commercial real estate investors and economists are expecting more interest rate hikes as the Federal Reserve continues to try and tame stubborn inflation, avoid a recession and attempt a softer landing for the turbulent U.S. economy. A recession can cause vacancies, rent collection, weakened property values and hesitant investors.
While 2023 could present some challenges for the commercial real estate industry, it is something to pay close attention to for investment opportunities. There’s nothing new about commercial real estate’s cyclical nature; the rising interest rates, inflation, dips in cap rates and the looming fears of a recession won’t intimidate any investor in commercial real estate. Property owners and investors with extensive experience know how to take advantage of the ups and downs. I wouldn’t count commercial real estate out when it comes to good investment options in 2023.
Anita Verma-Lallian is CEO and founder of Arizona Land Consulting.
