Commercial real estate transactions involving multifamily, retail, industrial, office, and hotel properties are down 53% from the same time last year. This isn’t a surprise as experts have long warned that rising interest rates would have a devastating impact on the commercial real estate market. In January 2023, Jamie Woodwell, the head of commercial real estate research for The Mortgage Bankers Association, explained the MBA expected “borrowing and lending backed by commercial properties to decline this year.” Even so, there has been $325 billion in commercial real estate sales in the first three quarters of this year, and understanding which sectors are the strongest and why can help real estate investors make sound financial decisions.
Retail real estate sales were just over $80 billion; however, they only saw a 37% decline this year. What’s more, several factors in place will likely boost values and sales in this sector for the foreseeable future. Consumer spending increased in the second quarter of this year, defying predictions of a recession in the second half of 2023. While e-commerce is becoming increasingly popular, tens of millions of customers still prefer to buy items in person in order to touch and feel items before purchase, avoid delivery fees, and/or obtain needed items immediately. Furthermore, demand for retail space is exceeding supply as retail space construction is at an all-time low. Even the additional space provided by the bankruptcies of large chains such as Bed, Bath and Beyond; David’s Bridal, and First Tuesday hasn’t managed to make up for the inability of the construction industry to keep up with retail space demand.
Industrial real sales also totaled just over $80 billion. They are down 44% from one year ago, but some experts believe that this sector offers good long-term investment possibilities. As a growing number of people shop online, demand for warehouse space will likely increase in the coming years. Many companies are still on-shoring manufacturing and product storage to prevent supply chain disruptions that could be caused by a future pandemic, conflict, and/or political instability in other countries. What’s more, demand for industrial retail space may exceed supply in the coming years. There is a record-breaking number of product completions but a significant drop in the number of new projects started.
Multi-family property sales are just under $80 billion but have declined by a whopping 65% from last year. This is surprising to some extent as the current housing market has forced many aspiring homebuyers to put off the purchase of their own home; thus, demand for rental properties is likely to remain high, and property owners can ensure profits remain steady by raising rents as needed. However, the fact that multifamily properties are highly sensitive to interest rates has caused investment in this sector to dwindle. Rising interest rates have also led to a 58% decline in investment in hospitality properties and have contributed to a 57% decline in office properties. However, it is worth noting that the sale of office properties is lower than it has been since 2010, a clear indication that this sector of commercial real estate isn’t in for a quick rebound. The COVID-19 pandemic has hastened the rise of virtual and hybrid work models, rendering office space obsolete for many firms. Even so, there are still opportunities in this sector, especially for those who are willing and able to convert office space into mixed-use developments that can provide residential, retail, and even industrial space to potential tenants.
High interest rates have certainly impacted the 2023 commercial real estate market, leading to a decline in overall sales across multiple sectors. However, some sectors are weathering the challenges better than others. Industrial and retail real estate sales are performing the best this year, followed by multifamily property sales, office sales, and hotel sales. In some instances, certain sectors are seeing a temporary decline that may reverse itself when interest rates come down in the future. Other sectors have been permanently affected by changing trends and technologies. Those who are considering investing in real estate this year would do well to consider the pros and cons of each sector carefully to make purchase decisions in their best interest.
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