The commercial real estate market took a beating in 2023. High interest rates and a credit crunch made it difficult if not impossible for commercial real estate investors to obtain financing. Now, however, there is cause for optimism. FED chair Jerome Powell recently announced that interest rates have peaked and will start decreasing in the coming months. This year could be an ideal one to invest in commercial real estate. However, to do so, it’s important to understand the options and the pros and cons of each type of commercial property.
Office space has seen a drastic drop in demand since the COVID-era lockdowns. Utilization is as low as 50% of pre-pandemic levels and the vacancy rate is currently over 18%. What’s more, demand for office space will likely drop in the coming years as companies and workers alike embrace a virtual or hybrid work model. However, that doesn’t mean that investing in this real estate sector is a bad idea. Class A office space is still in demand as potential tenants are putting a priority on newly constructed space with few maintenance requirements. Alternatively, those who are familiar with the market may want to consider purchasing low-cost office space to convert into mixed-use developments.
Industrial space is still in demand. This is especially true of space that can be used as a warehouse or fulfillment center for e-commerce companies. Demand for such space grew in 2023 even though there was a 43% increase in industrial square footage available in the same time period. However, would-be investors should bear in mind that this commercial real estate investment option is not without its risks. One problem is that many tenants would need to modify the space to meet their specific needs. This means that further modifications and upgrades may need to be done if the building is leased to another tenant later on. This same point also applies to retail real estate. However, the key difference is that many retail spaces hold multiple tenants, which means that the loss of a single tenant would not devastate the landlord. Like industrial space, retail has performed well in the last year, losing only 1.3% of its value from 2022 to 2023. Investors who familiarize themselves with the local market and pick a space that attracts high-performing anchor stores such as grocery stores and pharmacies have the potential to perform well in 2024 and beyond.
Multifamily real estate can be yet another good investment option. This property class tends to perform well. Therefore, it’s not surprising that it outperformed all other commercial property investment options in 2023. Furthermore, it has the potential to continue doing well as demand for such properties remains stable or even grows in the coming years. While rent prices are decreasing, investors can expect high returns. This is especially true for properties that offer popular amenities for their tenants. Sought-after amenities such as appealing communal office space, smart locks, digital appliance controls, and indoor/outdoor spaces where residents can congregate with family and friends.
There are many commercial properties with a high profit potential. Some, such as industrial and retail properties, have a bright outlook. Others, such as office space, are steadily losing value and will likely continue to do so for the foreseeable future. However, the truth is that there is no one commercial property type that is inherently better than all others. Investors will want to consider their own financial goals and situation before making a final decision, as some property types offer a relatively fast return on investment while others should be held for years or even decades before sale. What’s more, all potential investment options carry a degree of risk, so potential buyers will want to familiarize themselves with any local market they are considering before making a purchase. Migration patterns, population demographics, supply, demand, financing options, local zoning laws, and permit requirements should be taken into account when buying commercial real estate in order to maximize potential profits and lower the risk of loss.
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