The 5 Biggest Issues for Commercial Real Estate in 2023

The 5 Biggest Issues for Commercial Real Estate in 2023

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The last decade has been a wild ride for the commercial real estate market.

While it has experienced a solid increase across the board in demand, rental rates, and more, the recent pandemic and interest rate hikes have put the asset class to the test.

Here are the five biggest issues facing commercial real estate to watch out for in 2023.

Economic Uncertainty

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The COVID-19 pandemic brought significant economic uncertainty, making it difficult for commercial real estate investors to predict future market conditions. 

While the pandemic itself actually caused many markets, largely in the Southeast, to see unprecedented growth, investors are still uncertain as to how high inflation and high interest rates will impact the market. 

This concern is likely to continue into 2023 and 2024, making it challenging for groups seeking to make shorter-term investments in commercial real estate.

Long-term outlooks, however, are likely to take little to no damage from this uncertainty.

High Interest Rates

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Interest rates took a pretty significant spike in the 2nd half of 2022 with the Fed’s attempt to decrease inflation and we will certainly be feeling that impact this year. 

Higher interest rates mean that it is more expensive for businesses to borrow money, so not only will it be more difficult for tenants to grow and expand their reach, it will also be more difficult for investors to acquire commercial properties that cash flow at the desired yields. 

Until interest rates begin to decrease, property prices will have to adjust down in order to attract buyers in the short-term.

E-Commerce vs. Brick and Mortar

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E-commerce has been at the forefront of commercial real estate investors’ minds over the last economic cycle as its growth has had a major impact on the commercial real estate market. 

While many traditional brick-and-mortar retailers have found a way to weather the storm of online competition or even modified their business models to accommodate both, some are struggling to compete with the pricing and convenience of online retailers. Online shopping is here to stay, so it will be up to retail tenants to find a way to adjust their strategies while property owners find new methods of filling up vacant space. 

There is a winner here, however, in the industrial sector.

With next-day shipping becoming the norm, last-mile warehouses and distribution centers are in high-demand.

The Impact of a Changing Climate

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It’s no secret that climate change has become an increasingly pressing issue. Shifting environments means new problems for tenants and investors, alike. 

Take Florida, for example, where many insurance providers are pulling out of the market altogether due to the increased ferocity of hurricanes and subsequent damage, making it more difficult to find proper insurance coverage in certain areas.

Properties that were previously secure could now be in areas at higher-risk for storm damage, such as flooding or tornadoes, and may become less valuable as the risks increase. 

Keep an eye on weather patterns since that could impact your potential exit or your maintenance plans for the long-term.

Demographic Shifts

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The Boomer population is aging rapidly and this demographic shift is expected to have a significant impact on housing, the workforce, and the commercial real estate market, to name a few.

In fact, we’re already seeing how significant this impact will be with our current job market.

It seems like “no one wants to work” after the pandemic hit and while much of that may be attributed to individuals shifting to remote work positions or starting their own ventures, a good chunk of that is individuals taking early retirement - meaning those workers will never come back to the market. 

While the demand for office and retail space may decrease in certain areas, there is a silver lining. The demand for retirement and assisted living facilities, which has seen significant expansion this last economic cycle, is likely to continue to increase.

Remember: Invest for the Long-Term

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2023, just like any other year, will have a grab-bag of challenges for the commercial real estate market.

However, if you’re investing for the long-term, as any knowledgeable real estate investor is, the outlook is pretty positive.

That will certainly depend on the market in which you’re looking to invest, so take a look at the Urban Land Institute’s Emerging Trends of 2023 to see which markets are on the rise.

As a commercial real estate investor, it's critical that you keep an eye on these issues and navigate your investments accordingly to stay ahead in the market.

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