Optimistic Commercial Real Estate Market Outlooks

The commercial real estate market has been on an upswing for the past few years, and it doesn’t seem to be slowing down anytime soon. Many experts are predicting that the market will continue to grow throughout 2023. If you’re thinking of investing in commercial real estate, now is a great time to do so! In this blog post, we’ll take a closer look at the current state of the commercial real estate industry and what to expect in the coming years.

Among 450 CFOs of major commercial real estate owners and investment companies, 40% said revenues should increase in 2023, 48% saw revenues decrease, and 12% expected no change.

Key Takeaways

  • More than 80% of all commercial and multifamily mortgage debt is held by these three entities. The metrics that each type of investor uses to keep tabs on the status of their loans are incorporated into MBA’s overall analysis
  • Rising rental rates and decreasing vacancy rates are driving the optimistic outlook for the coming year.
  • Investing in the commercial real estate sector now is a great way to capitalize on this growth trend.
Optimistic Commercial Real Estate Market Outlooks

Top Reasons for Optimism in Commercial Real Estate 

1. Industrial space has been in high demand since the Covid recovery

The last two years have presented numerous difficulties. The demand for space swung dramatically as a result of shutdowns and work-from-home mandates, and the relative performance of office, retail, industrial, and residential spaces became more disparate than ever before.

Recent activity and economic performance indicators give us reason for optimism heading into 2022, despite the fact that the relative performance and resilience of property sectors remains uneven.

Colliers predicts that the manufacturing sector will be more resilient to the economic effects of the COVID-19 pandemic than other parts of the economy.

It is speculated that the high demand for e-commerce projects and groceries has lessened the impact on the industrial properties sector. There is still a significant demand for industrial space, as evidenced by the 329 million square feet of the industrial project currently under industrial space construction as of the end of the third quarter.

As the popularity of online shopping increased, businesses like Amazon thrived. In 2020, Amazon leased over 6 million square feet of warehouse space and had plans to expand further.

Due to the rise of e-commerce and the subsequent need to stock massive amounts of inventory and the use of third-party logistics providers, there is expected to be an increase in demand for industrial properties. The majority of bulk industrial leases (24.7% of all deals) were signed by third-party logistics providers.

2. A prolonged pessimism about real estate has become an optimism

The more appropriate word for it is one of cautious optimism. This cliche has been floating around for months, and the real estate business is no exception.

Maintaining a positive attitude is essential to success in any kind of business, including real estate. In the world of business, there is no room for pessimism. You can’t question yourself, you can’t second-guess yourself, and you can’t be indecisive. You have to keep your cool, keep an upbeat and positive attitude, and keep your attention fixed on the goals you have set for your business.

There have been a lot of abrupt shifts and some unwelcome financial turmoil this year. Nonetheless, there is still room for positivity and good things to look forward to in the commercial real estate market, despite all the problems and developments we continue to experience every day.

3. Stable markets expected to continue

Despite the economic downturn, it appears that the industrial real estate market is still doing well.

Cap rates for industrial properties are expected to remain relatively unchanged throughout 2020 despite the pandemic’s impact on the market.

The epidemic has greatly accelerated the nationwide trend toward greater e-commerce penetration, and more Americans than ever are making their purchases online. This shift in consumer spending has increased demand in the manufacturing sector, and this trend is forecasted to continue.

4. Low multifamily and commercial mortgage delinquency rates

The Vice President of Commercial Real Estate Research, Jamie Woodwell, reported that “commercial and multifamily mortgage performance continues to normalize,” with delinquency rates down or flat for every major investor group.

There are two possible explanations for the continued high level of delinquencies in certain industries. There are still loans being restructured by lenders and servicers that were severely impacted by the pandemic. For others, the reporting method may label forborne or other loans as delinquent, even after the borrower has brought the loan current. In all other areas, delinquency rates have returned to or are nearing their levels before the pandemic.

The MBA’s commercial/multifamily delinquency analysis for this quarter focuses on the five biggest investor groups, comprised of commercial banks and thrifts, CMBS, and life insurance companies Fannie Mae and Freddie Mac.

More than 80% of all commercial and multifamily mortgage debt is held by these three entities. The metrics that each type of investor uses to keep tabs on the status of their loans are incorporated into MBA’s overall analysis. Delinquency rates cannot be compared across investor groups because each group keeps track of them differently.

For example, if a borrower is given a forbearance from Fannie Mae but meets the terms of that forbearance, Freddie Mac will not see the loan as delinquent. by Q4 2021, the following delinquency rates were discovered for each category based on how much was still owed (UPB):

  • Reduce of 0.10 percentage points from the third quarter of 2021 to the present for banks and thrifts with accounts 90 days or more past due or in non-accrual
  • Unchanged from the previous quarter: 0.04 percent of life insurance company portfolios are 60 days or more past due.
  • Fannie Mae (60+ days delinquent): 0.42%, the same as in the third period.
  • Freddie Mac (60+ days past due): 0.08%, a decrease of 0.04% from the previous quarter.
  • CMBS (30 or more days delinquent or in REO): 4%, a 0.84-point decrease from the third quarter

Many regulatory definitions of “commercial real estate” include construction and development loans, despite the fact that they are frequently collateralized by single-family residential development projects as opposed to office buildings, apartment buildings, shopping centers, or other income-producing properties. The reported FDIC delinquency rates for mortgages held by banks and thrifts include loans secured by owner-occupied commercial properties.

5. Young buyers are looking for investment properties to build wealth

A new survey by Mynd, a company that specializes in technology tools to assist investors with single-family rental properties, has found that more young adults are choosing to purchase an investment property over their primary residence.

According to the Mynd 2022 Consumer Insights Report, 43% of millennials are considering becoming “rentvestors,” people who continue to rent their primary residence while supplementing their income with rental properties. However, only 27% of people born during the boomer generation and 9% of those born during Generation X use this method to accumulate wealth. It is noted in the report that some first-time investors view this as a chance to increase their wealth and enable them to better afford the cost of living in larger, more expensive markets.

Doug Brien, the current CEO and founder of Mynd, believes that younger generations are coming to the realization that purchasing investment property is the best way to have the best of both worlds. They are able to live wherever they want, even in pricey cities where they otherwise wouldn’t be able to afford to buy a home, and they are still able to become property owners.

By purchasing an investment property, individuals are able to maintain ties to the real estate market and still experience growth, while also not being married to one area, which allows them the freedom to go wherever their passions lead. The findings of the survey conducted by the company lend credence to this sentiment. Despite what is commonly believed, homeownership is still an essential component of the American dream.

Brien says that many millennials saw family and friends experience harsh financial losses during the Great Recession of 2008 because they were overextended on their mortgages. As a result, this generation is more hesitant to invest in stocks and bonds. As the economy stands precariously on the edge of recession, potential buyers might diversify their portfolios more.

He goes on to say that he thinks many millennials who buy investment properties do not see doing so as a stepping stone to home ownership, but rather as an investment that will one day coexist with their primary residence. He believes that the younger generation is optimistic about the future of the real estate market.

6. Multifamily markets continue to grow for a variety of reasons

Urban areas, where land is more scarce, are home to a disproportionate share of the country’s job expansion.

The urban population grew by 25% faster than the rest of the country between the years 2000 and 2010. Many young people today are opting to settle in urban areas because they offer better opportunities for employment and the kinds of amenities they value.

It is projected that by 2030, more than 60 percent of the world’s population will live in cities, up from more than 50 percent today. Cities may be the engines of global economic growth, but they don’t exactly teem with opportunities for human habitation.

Developers are pushed to their limits in urban areas due to high demand and limited available or affordable land. Multifamily buildings are built for eager city dwellers to maximize profit.

More and more apartment complexes are providing services that single-family homes don’t.

People who choose to live in urban multi-family housing development dwellings are usually on the lookout for a combination of a reasonable monthly rent and a variety of convenient on-site services and amenities that will make their apartment feel like home.

The best urban multifamily buildings typically provide residents with several amenities, including:

  • Walkability
  • Open Lands
  • Indoor facilities like gyms and offices, etc.

7. Medical & laboratory space is still in high demand

According to CBRE’s 2021 Report, the top 12 U.S. life sciences hubs are in high demand for new lab space as the industry expands rapidly due to global competition for drug development.

The vacancy rate for existing lab and R&D space in the United States is currently 4.9%, which is a record low, with rates as low as 1.1% Boston-Cambridge and New York City. As expected, average asking rents have increased significantly in the top 12 markets by 7.5% since September 2021, due to high demand and lack of available space.

I also wrote about the real estate trends in 2023, make sure to read it because it will help you understand the market better, read it here.

Optimistic Commercial Real Estate Market Outlooks FAQs

Is rental property a good investment in 2023?

As interest rates rise, rental properties can be a good long-term investment if you have your finances in order, according to CBANews.

Even if it’s just a few dollars a month at first, a rental property should be bringing in some sort of income every month. Make sure the property you’re considering is a good investment by running the numbers. Talk to a banker or a real estate agent in your area.

What state has the hottest real estate market?

California! The Golden State’s housing market is the most robust in 2022 thanks to the state’s high-income levels, rapid rate of new construction, and ample supply of homes. The ratio of new homes being built in California to the total number of homes on the market (27,227) is indicative of a healthy housing market in the state.

Is the commercial property a going concern?

The straightforward response to the query of whether or not a commercial property can be sold while it is still operating as a business is that one can, in fact, do so.

How do rising interest rates affect commercial real estate?

When interest rates rise, the cost of borrowing money rises along with it, reducing demand from companies and investors. Borrowing money for commercial real estate projects by businesses is getting more expensive. This may result in a decrease in building activity and stagnation in the real estate market.

What type of commercial real estate is the most profitable?

Properties with a large tenant pool tend to generate higher returns for their owners. Multi-family developments, student residences, office space, self-storage facilities, and mixed-use structures are all examples of commercial real estate.

Conclusion

So if you’re thinking of buying or selling property in the next few years, it’s looking like 2023 might be a good time to do it. Of course, no one can predict the future for certain, so it’s always important to consult with commercial real estate professionals before making any big decisions. My team here at Toljcommercial would be happy to help you figure out whether now or later is the right time for you to buy or sell. I offer free consultations, so why not give me a call today and see what I think? I look forward to hearing from you soon!

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