The way we work, live, and spend money is transforming. Coupled with a changing economic climate (aka: whispers of an impending recession - more on that in a bit), 2023 will usher in an abundance of commercial real estate investing opportunities that are promising to yield high returns for investors savvy enough to spot and capitalize on these trends.
The good news?
You don’t have to speculate or guess about which commercial real estate investments will garner the best returns.
We’ve done an analysis of the current commercial real estate investing landscape so you don’t have to. And we’ve found the top three trends that are paving the way to high ROI for investors in 2023 and in the near future.
We’re here to help make this the year you expand your CRE investments - or perhaps the year you finally make the leap into commercial real estate investing.
But first, let’s address the elephant in the room.
Is Investing in Commercial Real Estate a Good Idea Right Now?
This is a question that’s top of mind for current and aspiring commercial real estate investors alike. And our answer is a resounding “yes!”
Recent stats from the S&P 500 report that the current annual return, or ROI, on commercial real estate investing is 9.5%. Meanwhile, REITs, or real estate investment trusts, have an 11.8% average return. In fact, REITs have delivered a 20-year average return on investment of 10.91%, according to the National Association of Real Estate Investment Trusts.
A Recap of the 2022 Commercial Real Estate Investing Climate
In Q1 of 2022 alone, commercial real estate property transactions totaled $161 billion.
Let’s look at the specifics from J.P Morgan’s mid-year real estate investing report:
A labor shortage had companies looking for new ways to attract talent, which is translating to new job perks, such as daycare spaces and services, outdoor-indoor work environments, new office layouts, and hybrid workplaces. Developers and commercial real estate investors have the opportunity to provide these spaces for companies to rent.
There was an estimated housing shortage of anywhere from 2 million to 5 million units at the national level in mid-2022, with an 8.1% record-high rent price growth. Not only is there a demand for housing in general, but there is a dire need for low-income and affordable housing options in cities all across the United States.
Strip malls in densely populated residential areas performed well, with in-person service-based businesses delivering strong numbers. Meanwhile, larger malls were struggling. Their proximity to parking spaces and loading docs could be repurposed to fuel housing and industrial demand.
The best opportunities in commercial real estate investing right now are all about finding the potential in currently vacant buildings and investing in those that could be multi-solution. As you’ll soon see, there are multiple instances where these 3 trends actually overlap.
Looking Ahead to 2023: 3 Trends Impacting the Commercial Real Estate Market
Commercial real estate investing is and has been a proven way to get a solid ROI on your investment dollars. While a high return on investment is never guaranteed, we can highlight some of the most promising commercial real estate investment opportunities in the industry.
Here are the top 3 trends that we believe will dictate the commercial real estate investing industry for the rest of 2023.
1. The Back-to-Office Exodus/Migration
There’s no denying that 2020 and 2021 fundamentally changed how businesses and employees operate. But 2022 and 2023 showed that companies are increasingly calling their teams back to the office - and many people are ready to go.
In a recent survey, 44% of executives said they are ready to return to the office. About 17% of workers and employees reported that they would prefer to go to the office, at least some of the time. For millions of Americans, working in the office is an opportunity for greater collaboration, more social interaction, and a better work environment.
Even President Biden has weighed in on the matter, saying, “It’s time for Americans to get back to work and fill our great downtowns again.”
That’s potentially good news for those in commercial real estate investing.
In fact, tours of office buildings jumped up 20% between February and March of 2022. Meanwhile, year-over-year office space vacancy rates dropped from 16.4% in Q1 2021 to 12.3% in Q1 2022. We expect this trend to continue and accelerate in 2023.
The Takeaway:
Back to office trends are driving an increased interest in commercial real estate investing. Investors have an opportunity to expand their portfolios to include office buildings, invest in new commercial real estate developments, and/or make plans to convert eligible buildings into office spaces in 2023.
2. A Demand for More Affordable Multifamily Housing
A housing crisis means opportunities for commercial real estate investors to make an impact in local communities while growing their own bottom line.
But we aren’t talking about single-family homes.
Inflation, rising home prices, and higher interest rates are creating more demand for affordable multifamily properties in cities all around the US.
Investors interested in commercial real estate investing are well-poised to modernize dated housing buildings, build new ones, and convert empty properties. Amongst the commercial real estate investment opportunities J.P Morgan cited in last year’s mid-year report was workforce housing: “The biggest impact may come from public-private collaboration, such as big tech and healthcare employers working with local governments to develop housing near workplaces.”
The Takeaway:
The demand for affordable and low-income multifamily apartment buildings far exceeds the current supply. This presents a significant commercial real estate investing opportunity with potential with long-term, year-over-year returns. Investors could see both passive income in the form of rental payments and near-term ROI..
3. Repurposing Retail Spaces
Shopping habits are evolving and while some commercial properties are seeing a boom, others are struggling. Class B and C malls are finding themselves in the latter category, presenting the commercial real estate investing community an opportunity to pioneer a retail space revolution.
The future of these empty retail spaces look very different from the malls of yesteryear. With ample on-site parking, overhead doors, and truck ramps, CRE investors are seeing their potential as converted affordable housing units, fulfillment centers, warehouses, mixed space complexes, and other industrial needs.
The takeaway:
Less a bounceback and more a makeover, struggling retail spaces can serve as prime commercial real estate investing opportunities for those that are ready to seize them. In some cases, large malls in urban areas are struggling, and those willing to take on the initial remodel costs can expand their portfolio exponentially as the demand for affordable housing and industrial properties expand in the years to come.
The Impact of a Recession on Commercial Real Estate Investments
There it is - the “r” word. No discussion about commercial real estate investing in 2023 would be complete without acknowledging the current economic situation in the US.
A recession is defined as a period of a widespread downturn in the economy, and not just in one sector or state, but across the entire country. This is linked to a negative gross domestic product (GDP) growth, and following several tough years during the pandemic, experts are saying 2023 might be the year we officially fall into a recession.
Additionally since 2022, Americans are already feeling the impacts of inflation - up about 7% from 2021. Companies are slowing down their hiring, tech companies are laying off, interest rates are still climbing, and consumer savings are running down.
But it’s not all bad news if you’re looking to get into commercial real estate investing this year.
Ways to Recession-Proof your CRE Investment Portfolio
No investor is completely immune to the effects of an economic recession. That being said, there are ways to create and protect your commercial real estate portfolio in challenging times.
In fact, many commercial real estate investments, such as low-income housing and multifamily housing, can see an increased return despite an overall economic downturn.
For example, while high interest rates may reduce some of the initial appeal for CRE investors, it also makes home buying more difficult, thus increasing the demand for more affordable rentals.
Here are some things that everyone interested in commercial real estate investing should consider, regardless of how long you’ve been investing:
Diversify the types of commercial real estate properties you invest in
Balance low and high risk investments
Use real estate investing as an opportunity to leverage tax advantages
Use a company that lets you invest flexible amounts to suit your needs
Invest in properties that provide rental income
How EquityBrix is Powering the Future of Commercial Real Estate Investing
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EquityBrix is not an investment adviser. This information is for educational purposes only and does not constitute investment or tax advice. It’s important to be informed and to make your own investment decisions or do so in consultation with a professional financial advisor. Under no circumstances should this material be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of a written online prospectus relating to the particular investment.
