In the wake of the COVID-19 pandemic, the global real estate market is undergoing dramatic transformations in the way buildings are used, valued, and traded. With inflation on the rise, increasing geopolitical tensions, and growing concerns about a future recession, investors want to reduce forthcoming risks by transferring their money from the stock market to real estate.
In a world that is becoming increasingly uncertain, it is imperative for business owners to understand the changing trends in the commercial real estate market and adapt their strategies accordingly.
In this article, we will give an in-depth presentation of some of the key trends that will drive commercial real estate in the US and global market in 2023 and beyond.
PropTech Takes Center Stage
While material prices continue to skyrocket, real estate companies are looking for ways to combat inflation and minimize costs, which might be possible with today’s technology solutions. A dominant theme that has emerged in recent years and is expected to become even more prevalent in 2023 is commercial real estate technology.
Teams involved in building design encounter a variety of obstacles throughout the planning process. Designing for sustainability adds even more complexity to the process, primarily because it requires the integration of “green” principles and compliance with environmental laws and regulations. Several innovative technologies have emerged to target such challenges, with PropTech companies gaining significant ground in recent years. BeamUP, for example, is an Israeli startup that has launched the world’s first AI platform for sustainable design and lifecycle management of commercial real estate. US-based Versatile is also using machine learning and AI to improve construction and industrial processes.
Last year, more than $24 billion was invested in PropTechs globally. So, we will probably see more and more real estate companies turning to high-tech solutions to optimize construction in 2023 and beyond.
Multifamily Properties Remain Prominent
The multifamily housing market has seen significant growth in recent years. With increasing demand from investors, renters, and homebuyers, as well as new laws promoting affordable housing, it is reasonable to say that multifamily properties will remain in high demand in the US in 2023.
Environmental, Social, and Governance (ESG) incentives are becoming increasingly important in residential real estate purchases as regulation advances and transparency becomes more valued. However, single-family home prices have dramatically increased during the COVID-19 pandemic. Emerging research shows that the average single-family home is 43.7% more expensive today than it was in 2019, and the ratio of existing single-family home prices to multifamily rents is alarmingly approaching pre-Great Recession levels. As a result, prospective single-family homeowners are opting to rent instead, having been unable to afford the price of a home of their own. This, in turn, is driving up demand for multifamily housing.
Office Real Estate Faces Adjustments as Employee Expectations Have Changed
Evolving employee expectations often complicate recruiting and retention, and organizations can only hire and retain talented employees by understanding these expectations. Since the COVID-19 pandemic, the number of people working from home has increased considerably, and the general outlook on remote work, as well as the future of the workplace, have changed. Even long after the peak of the pandemic, hybrid or remote work remains the preferred option for those whose jobs can be done remotely. However, in many circumstances, this is not a valid option.
Workplace redesign and flexibility are also very important, since more and more employees now expect first-rate office spaces in exchange for giving up the convenience of remote working. Flexible working hours will also be a decisive factor for employees when evaluating job offers and choosing their place of work. For employers, this means that adopting a hybrid work model will be essential to hiring and retaining talent in the near future. According to a recent Deloitte report, a significant number of business owners plan to increase diversity, equity, and inclusion (DE&I) initiatives, add more health and wellness benefits, and offer remote-working options. However, only about a third (or fewer) of companies are prioritizing initiatives such as redesigning workplaces, implementing flexible work schedules, and providing greater opportunities for career and skills development.
The Impact of a Potential Recession on Retail Growth
When it comes to retail real estate, the potential for a recession is high on the agenda. Expected continued high land and construction costs, as well as anticipated constraints on development in centrally located areas, are likely to intensify competition for existing space. In addition, continued supply chain disruptions and high inflation could impact tenants’ profits and affect their location strategies.
Forecasts predict that e-commerce sales will continue to gain even more share of total retail sales over the next decade, rising to over 33% by 2031. Although e-commerce growth is expected to remain a long-term driver for the sector in 2023, the slowdown in e-commerce penetration has caused logistic companies to postpone opening new warehouses. Even though businesses will continue to expand in the foreseeable future, they may not be able to purchase properties at a reasonable price.
A potential recession will also lead to fewer buyers and lower demand overall. Consumers will start spending less, while large companies will focus more on maintaining flexibility on their balance sheets as liquidity dries up.
Leasing Activity Could Be the Silver Lining
Despite overall performance reservations, there is still some optimism when it comes to commercial real estate, with many specialists citing strong demand for rented space as a source of confidence in these uncertain times. Studies forecast an improvement in leasing activity, with corresponding optimism about vacancy reduction and rental growth.
Industry experts also believe that there will likely be more dynamic pricing on a lease-by-lease basis, rather than sweeping rate cuts. Once the uncertainty in the market will subside, investors will put a lot of capital into this sector. Rising mortgage rates will boost demand for rental housing, as households (especially first-time buyers) will rent for longer periods. While rental growth is currently in double digits, it is expected to slow in the US in the near future.
The Bottom Line
With fears of a possible recession growing, the commercial real estate market is likely to face major challenges in the coming years. However, understanding the market trends and being prepared for the foreseeable future, could help business owners find the right strategies, plan ahead, and create new opportunities.
