In May 2023, commercial real estate prices fell for the first time in twelve years. What’s more, Moody Analytics’ chief economist Mark Zandi is predicting that, by the time mid-2020s, prices will plunge 10% lower than their peak in the mid-2010s. This isn’t welcome news to most commercial real estate investors. However, some experts note that there are golden opportunities in the current market for those who know where to look.
Commercial office space is facing particularly strong headwinds. Almost 20% of all office spaces in the United States are empty. The rate rises to more than 25% for large cities such as Los Angeles and San Francisco. As mortgage loans for these buildings come due, investors and landlords may find it difficult or even impossible to refinance their mortgages at a reasonable interest rate. This will likely lead to a spike in foreclosures and short sales. Investors can take advantage of this opportunity to snap up profitable office space at a good price. Newer buildings that include amenities such as good ventilation, outdoor space, gyms, and automated systems could be ideal investments. This is especially true for cities that are currently seeing a high influx of new residents. Miami and Fort Myers in Florida are growing at a rapid pace. Georgetown City and Leander, both suburbs of Austin, Texas, are also seeing a population influx.
Investors may also want to be on the lookout for distressed properties that can be converted into mixed-use developments. Demand for properties that can be used for both residential and commercial purposes has grown in the last 20 years and shows no signs of slowing down in the near future. Commercial venues favor mixed-use properties, as they give stores, restaurants, and other businesses easy access to a large pool of customers. At the same time, residential tenants benefit from easy access to important amenities. In fact, a recent survey by the National Association of REALTORS® found that more than half of Americans prefer to live in a walkable community. What’s more, mixed-use developments are less risky than other commercial real estate options as there is demand from both commercial and residential clients.
Another good investment is industrial and warehouse space. The vacancy rate for industrial developments is 4.4%. This is a bit higher than the 3.9% vacancy rate recorded in mid-2022, but investors expect this niche to remain profitable for several reasons. The exponential growth of the e-commerce industry will ensure that demand for storage space remains steady. Furthermore, a growing number of companies are reshoring due to the Ukraine war, a slowdown in China’s economy, and other factors. Additionally, many firms have seen the importance of producing and storing stock in the local area in the wake of the COVID-19 lockdowns and supply chain disruptions.
Multifamily properties are also an ideal investment. Everyone needs a place to live and rising interest rates are making it hard for many aspiring homeowners to obtain a loan. Thus, demand for multifamily properties is likely to remain high for the foreseeable future. The best proprieties are found in cities with a high population growth rate. Investors will also need to choose a target demographic with care in order to provide the features and amenities needed to keep occupancy rates high. Those targeting students, for instance, will want to ensure there is easy access to public transport near the community. Top amenities for most other tenants include parking space, outdoor areas, smart thermostats and access control for convenience and comfort, and pet amenities.
Investors will want to do careful research to identify demand and an ideal target demographic before making any commercial real estate investment. An awareness of local zoning laws and regulations is also a must to avoid investing in a development that cannot be used for its intended purposes. Even so, commercial real estate investors throughout the United States are sure to find ideal investment opportunities in almost about every state if they know where to look and are willing to take calculated risks to invest in property that is set to grow in value in the years ahead.
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