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21 Commercial Real Estate & Technology Trends to Know in 2023

commercial real estate trends
Matt Carrigan

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This blog post was last updated on October 18, 2022 with new information about the latest commercial real estate trends.

While the post-pandemic recovery saw record levels of funding and robust investment volume, numerous commercial real estate trends now point to slowing momentum. The market is facing newfound challenges and uncertainty as growth slows and interest rates rise. Rather than halting transactional activity, though, these macroeconomic changes have prompted investors to adapt their strategies and redefine success.

Investors are increasingly concerned with the overall macroeconomic climate, which is experiencing mild contractions. GDP decreased 0.6% in Q2 2022 – representing the second consecutive quarter of contraction after a 1.6% drop in Q1 2022. Nevertheless, labor markets remain strong and unemployment rates hover near pre-pandemic levels. 

As the Fed continues to raise interest rates, uncertainty over lending environments and their influence on commercial real estate transactions loom. Inventors must resort to creative solutions to overcome present challenges while also directing resources to emerging opportunities.

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Commercial Real Estate Financial Trends

1. Commercial Real Estate Investment Increases by 10% YOY in Q2

Despite broader economic uncertainty, investments in commercial real estate remained largely steady throughout the first half of 2022. Building on momentum from 2021, the volume of U.S. commercial real estate investment rose by 10% year-over-year in Q2 2022 to $167 billion

The easing of Covid-19 restrictions, coupled with a gradual return to the office, has invigorated urban markets previously dampened by the 2020 pandemic. On a trailing-four-quarter basis, New York was the top market for investment volume, attracting $67 billion. Los Angeles came in second, bringing in $65 billion in investment volume. 

Investors are particularly drawn to multi-family housing and apartment complexes, largely driven by rising rents and a housing supply shortage. Sales for the multi-family sector hit an all-time high of $277.2 billion in Q1 2022. Meanwhile, sales for office spaces hit $114.7 billion, $127.7 billion in industrial, and $96.9 billion for retail. 

Nevertheless, rising interest rates as well as weakening economic activity may affect commercial real estate transactions in the coming months. Investment volumes may fluctuate as a rising U.S. dollar strains foreign buyers.

2. Commercial Prices Have Declined by 5% in the Last 3 Months As of October

According to Green Street’s Commercial Property Price Index, prices dropped by 5% over the past 3 months as of October. Although prices are still 7.7% higher than pre-pandemic levels, they nonetheless fell by a slight 0.5% year-over-year. Rising interest rates, as well as sales in financial markets, have largely dampened commercial prices. Experts anticipate volatility and possible price drops throughout the end of 2022 into 2023. 

These recent fluctuations follow a period of strong growth for commercial property prices. According to RCA’s commercial property price index based on data from May 2022, prices increased 18.6% year-over-year. This indicates that recent market shifts have driven this slight decrease.

Net leases saw the largest drops in property value at -9%, followed by malls at -5% and offices at -4%. Despite the overall decline across commercial prices, self-storage facilities saw a 17% uptick in property values, alongside lodging at 7%, healthcare at 1%, and strip retail at 1%.

CBRE’S H1 2022 Cap Rate Survey, which measures sales comps from January to early June, found that yield compression has ceased, and cap rates are starting to tick slightly upward. Survey respondents largely expect cap rates to continue to increase over the next six months, especially as borrowing costs increase. Multifamily housing continues to have the lowest cap rates at 3.2%, while office spaces have the highest at 4.9%.

3. With Leasing Activity Down, Trends Move Toward Shorter, Smaller Suburban Lease Agreements

The worst of the pandemic might be over, but companies and institutions are still treading carefully when it comes to long-term decisions like leasing. Nationwide office vacancy rates at the end of 2021 hit 12.2%

In a world that increasingly favors hybrid work, these figures are further proof of a paradigm shift. Companies that once viewed office space as a necessity must now determine which model they’ll adopt moving forward, whether they need the same space, and other considerations. In the wake of this uncertainty, commercial real estate trends have shifted toward shorter leases, or those less than two years, providing companies with more flexibility when it comes to securing space. Leases also generally favored smaller spaces. Unlike central business districts, where this trend was most noticeable, suburban offices have proven to be a more reliable target.

4. Commercial Real Estate Firms Trend Toward Cutting Costs

The goal for any organization is to cut costs while boosting profits. As commercial real estate professionals continue to navigate an industry mired by slowing economic activity, rising interest rates, increased borrowing costs, and greater uncertainty, cost reduction has become a priority initiative, according to Deloitte.

As firms continue to find ways to cut costs, technology that streamlines processes, centralizes information and boosts efficiencies will remain a commercial real estate trend.

5. Rental Growth Across Major Property Sectors

Rents rose across major property sectors in the first quarter of 2022. Apartments saw the greatest increase YoY at 11.3%, followed by industrial at 11%, retail at 3.9%, and office at 0.8%. Rising rents have been propped up by a combination of supply shortage, strong wages, and rebounding demand following the pandemic. They’re also a result of rising prices across the economy. 

Stable rent growth signals promising potential for investors. However, rising interest rates and increased borrowing costs continue to dampen deal profitability. Overall, market indicators point to a cautionary outlook. Concerns around slowing commercial prices and leasing activity suggest growth may slow amidst greater uncertainty. 

6. Debt Funds Experience Influx of Nonbank Capital

As banks struggle to navigate red tape that makes it more difficult to approve loans on riskier deals, the share of real estate debt fund capital provided by banks has decreased. In turn, institutional players like insurance companies and pension funds have raised more debt capital. Many of these institutions intend to continue investing heavily in the commercial real estate market. 

7. ESG Transitions from Trend to Important Criteria for Commercial Real Estate Investors

Environmental concerns have permeated every sphere of life, and commercial real estate trends are no different. Competitive investors have increasingly prioritized ESG, or environmental, social and governance-related considerations. According to PGIM, over two thirds of investment management firms have now adopted ESG standards in their investment criteria, with a particular emphasis on environmental factors. 

While ESG is nothing new, the jolt forward occurred most recently in US and Asia Pacific markets, which lagged behind Europe. 

Beyond doing their part to help the environment, environmentally friendly investments can actually be quite lucrative. Boosting energy efficiencies lowers operational costs, creating higher profit margins. Additionally, ESG certifications can open doors to new funds, exclusive lending deals and even more selective, profitable tenants.

8. Creative Solutions to Tightening Financial Markets

Rising interest rates have become one of the most prominent commercial real estate trends throughout 2022 and into 2023.  In September, Fed policymakers announced plans to raise the central bank’s overnight interest rate to an upped benchmark range of 3.00% to 3.25%

Tightening monetary policy has increased borrowing costs and limited available financing opportunities for CRE investors. According to the H1 2022 Cap Rate Survey, investors have concerns that rising rates may lead to tightening underwriting and lending assumptions – making financing more difficult to secure. 

As investors look to attract liquidity amid tightening financial markets, many are turning to capital recycling. Capital recycling is the process of disposing assets to fund new acquisitions.  For cash-strapped investors, this can be a great way to optimize and restructure a high-performing portfolio. 

Commercial Real Estate Market & Asset Class Trends in 2021

9. Retail Continues to Evolve

E-commerce was rapidly growing prior to the pandemic, but months of quarantine only exacerbated this growth. By the end of 2022, e-commerce is expected to account for 20.4% of global retail sales. Among the commercial real estate trends resulting from these conditions is the declining importance of retail as an asset class. Small businesses suffered from a decline in foot traffic, but even JCPenney, Lord & Taylor and Brooks Brothers, once established retail giants, filed for bankruptcy.

While the prominence of retail might continue to decline, it won’t fade away entirely. Instead, the role of physical stores will change. Future-facing retail strategies prioritize an omnichannel approach to sales, engaging customers in-store, online, and via mobile. Physical stores will continue to play the ever-important role of acting as distribution centers, pick-up locations and showrooms, which will grow more sophisticated as augmented reality technologies help customers understand how products fit in their spaces. Customers may place orders online, but brick-and-mortar buildings will deliver an important experience that drives brand loyalty.

According to CBRE, there may be 20% less retail-dedicated real estate by 2025, as the asset class undergoes a transformation. High-quality retail investments may not stoke the same fear, but these transactions will call for a thorough, data-driven analysis to prove their mettle in a changing world.

Breaking from the downward trend throughout 2020, retail had grown somewhat by the end of 2021. The fastest growing areas in the US were characterized by their location, service offerings and neighborhood presence. However, there’s still a long way to go before the conversation shifts from recovery to net expansion. 

10. Mall Declines in Popularity, With Repurposing on the Horizon

Like retail, malls also suffered a decline in foot traffic as e-commerce surged. Despite the shrinkage, opportunities within this sector still exist. Strip malls in densely populated residential areas are outpacing traditional malls, especially in terms of rent. Among other factors, mixed use strip malls can attract a diverse range of tenants, such as grocery stores, salons, eateries and professional services. 

Income from strip centers rose at 4.7%, the highest pace within the retail sector. On the other hand, rents increased by 3.8% in malls. 

Investors are also finding opportunities in repurposement. According to NAR’s 2021 Q1 survey, investors indicated intentions to repurpose vacant malls into a variety of other asset classes. 39% of respondents indicated that malls were being developed into mixed-use properties, which includes residential, retail and office. 25% indicated that they were suited well for industrial properties or fulfillment centers. As time goes by, this commercial real estate trend will likely become more prominent.

11. Industrial & Warehouse Properties Soar in Popularity & Occupancy

The e-commerce boom has set in motion many commercial real estate trends, most notably a strong boost in popularity for industrial properties like warehouses and final-mile fulfillment centers. Even as retail declines, distribution centers will remain integral for businesses of all sizes. That means building a network of distribution centers, spanning cities, highways, and even rural areas, is key to delivering on delivery time windows.

According to the NAR Commercial Market Insights April 2022 Report, Miami saw the greatest levels of industrial rent growth in Q2 2022 at 18.6%, followed by Columbus, Ohio at 17%, and Fort Lauderdale, Florida at 16.7%.

12. Multifamily Markets Have Shifted, and Are Shifting Back

Investors traditionally look at multifamily as a relatively low-risk investment, given the constant need for affordable renting space, especially in cities. The urban exodus incited early on in the pandemic, however, tested this once-standard rule of thumb. Following this trend, the commercial real estate market turned to suburban markets. Exhausted by working in small spaces in crowded cities, people sought the comfort of larger units and outdoor areas. 

While urban multifamily’s popularity declined early on in the pandemic, it’s now experiencing a resurgence in popularity. As companies return to the office, workers are finding themselves relocating to central business districts. Strong job and wage growth have also contributed to increased demand in this sector. 

Investments in U.S. multifamily properties saw significant boosts in Q1 2022, increasing by 56% YoY to $63 billion—the strongest first quarter on record. 

13. Life Sciences Booms in a World With New Priorities

The pandemic exposed the need to devote greater attention toward proactive medicine development, paving the way for life sciences to shine even brighter. According to JLL’s 2021 real estate life sciences lab outlook, the commercial real estate trend toward life sciences stems from a stronger desire to live long, healthy lives, as well as the movement toward personalized medicine borne from living organisms, called biologics.

While 2021 was a strong year for venture capital inflows and company valuations, tightening monetary policy may be reversing past trends. Demand, as measured by tenants touring the market for space, dropped 33% YoY across the top-five markets from historically high levels. 

14. Office Demand Showing Moderate Recovery 

Perhaps the most prominent and enduring commercial real estate trend sparked by the pandemic is the transition to remote and hybrid workplaces. There is some noticeable reversal, as companies call employees back into offices and adopt a hybrid model. Nonetheless, the percentage of people working remotely by the end of 2021 still remains above pre-pandemic levels. 

According to JLL’s Office Market Outlook Report, leasing activity remained effectively flat during Q2, 2022. Meanwhile, gross leasing activity increased by a modest 0.1%, as tenants put expansion plans on hold amid tightening monetary policy. A record-high number of leases are set to expire in H2 of 2022, which could drive additional leasing activity.

Office markets continue to be bogged down by rising interest rates and broader economic uncertainty. Although demand remains steady, growth is expected to continue at a moderate pace. 

15. Ghost Kitchens Take a Stronger Hold on Restaurants/Retail

In the early days of the pandemic, restaurants had no choice but to shutter their doors amidst restrictions, generating revenue mainly through delivery and pick-up. Even once restrictions were lifted, many still grappled with seating restrictions, low consumer confidence and other variables that restricted cash flow. All the while, they paid high overhead costs like rent, payroll and more. 

In the wake of these high overhead costs came ghost kitchens, or facilities that cook food onsite and exclusively deliver it. Without the costs of building, decorating and maintaining a dining room, or paying servers, ghost kitchens enjoy a leaner operating budget than traditional restaurants. This commercial real estate trend gives property managers more options when it comes to leasing, as the space required to operate a ghost kitchen is dramatically smaller than a restaurant. 

16. Cities, Particularly Central Business Districts, Rebound

Early on in the pandemic, cities suffered as residents retreated to the suburbs for more space and stronger amenities. Now, the tides have changed and cities, particularly central business districts, are showing rental growth

Office property asking rents were up 1.3% year-over-year on average nationally in Q2 2022. Growth has been particularly strong in urban hubs like New York, Los Angeles and Houston, which have attracted the largest number of investment volumes as of Q2 2022. Houston, in particular, showed the biggest year-over-year increase in trailing-four-quarter volume at 150%.

Aggressive hiring, coupled with employees returning to the office, have played a critical role in reinvigorating cities after the pandemic. Strong consumer demand has also driven people to large metropolitan areas.  

17. Operational Real Estate Like Storage, Senior Living & Student Housing Are Trending Upward

While not a traditional focus for most investors, operational real estate in niche markets like storage, senior living, student housing and life sciences have all gained momentum. From 2020 to 2021, the percentage of total CRE investment on operational spaces doubled to 12.3% in 2021. As the share of older Americans needing living facilities and healthcare services grows, this commercial real estate trend will likely gain steam.

18. The Rise of Single Family Home Rentals

Rising interest rates have made home ownership increasingly difficult to obtain for many millennials. On the other hand, some people would rather forgo the costs and responsibilities of homeownership altogether to opt for greater accessibility. Amid a nationwide shortage of housing, single family home rentals help fill a critical gap in residential markets. They’re also catching the attention of some of the world’s largest institutional investors. 

In early 2022, Blackstone made headlines for planning to dedicate another $1 billion on top of its existing $6 billion single family home rental portfolio. By the end of 2022, investments into single family rentals nationwide are expected to reach $50 billion –  constituting the fastest-growing sector of the American housing market. 

Investors are increasingly noticing ample opportunity in this sector, especially as housing rents rise nationwide. High mortgage rates are also increasing demand for rentals, as many would-be homeowners push off purchases until interest rates ease.

Commercial Real Estate Technology (Proptech) Trends

19. Technology & Software Remain a Top Priority for Organizations of All Sizes, Across Verticals

When it comes to technology adoption, commercial real estate is pacing behind adjacent capital markets, like the equity market. The past few years have given rise to the ongoing proptech revolution, during which firms gradually took on technologies that simplified outdated processes. Many firms saw this as an opportunity to consolidate functionality that previously lived within disparate systems. For example, Dealpath, the leading deal management software platform for investment management firms, centralizes deal data, workflows, communications, and files, fueling collaboration, productivity and transparency. Other new technologies help property managers find ways to optimize the tenant experience using the IoT (internet of things). 

The rapid and forced transition to remote work in March of 2020 only added fuel to the fire. Facing the new challenge of collaborating from remote environments, without the option for in-person meetings or casual conversations, commercial real estate firms recognized the immediate need to move to the cloud. 

According to a Deloitte survey, 56% of respondents indicated that the pandemic exposed their firm’s shortcomings when it comes to digital capabilities. The pandemic catalyzed this ongoing digitization, and having recognized the value of modern technology, achieving full tech enablement has become a priority. 53% of respondents have a roadmap of where they’d like technology to take them, and 32% are restructuring internal processes based on technology and tools. 58% of surveyed REITs and 45% of developers said that they wanted to partner with technology companies, showing that firms are responsive to the evolving landscape.

20. Investors Will Continue to Make Faster Decisions 

Resulting from the aforementioned proptech revolution is an ongoing paradigm shift in which investors have the deal and data visibility required to make faster, more precise decisions. Streamlined access to standardized data allows investors to glean strategic insights at a significantly faster pace than would be possible with more traditional methods, like Excel spreadsheets.

As larger institutional firms like Blackstone continue to amass unprecedented amounts of capital, as well as benefit from economies of scale, these competitive insights will play a significant role in informing investment strategies. Because tech-enabled firms can find the insights they need to make informed investment decisions within centralized systems, investors will continue to operate at a faster pace.

21. Cybersecurity Takes Center Stage as Data Security Comes Into Question

Data has always stood as a central pillar of the commercial real estate industry, but the new tools available have increasingly emphasized its value. Increasingly frequent data breaches, however, have highlighted the urgent need for a strong focus on cybersecurity. To protect against ransomware attacks, firms need to take additional measures, using modern standards as the benchmark.

According to NAREIT, BDO USA LLP, a professional services firm, identified that 92% of the 100 largest publicly traded REITs considered cybersecurity a threat, up from 63% in 2015. 96% of office-focused REITs considered it a threat, as well as 93% in hospitality, and 92% in multifamily. From a financial standpoint, data has already more than proven the importance of increasing security measures. Kaspersky found that, on average, an enterprise-level breach cost $1.41 million in 2019, which increased from $1.23 million in 2018. 

Throughout the lifecycle of an asset, data might flow through multiple systems as it is handed off through various departments. To sufficiently protect data at every touchpoint, firms must ensure that every platform data flows through meets required standards. From providing role-based access to platforms, to tracking user activity on those platforms, and sophisticated network controls, the need for an advanced approach to cybersecurity is stronger than ever. 

As you audit existing platforms and add new ones to achieve these goals, look for best-in-class security standards, particularly SOC 2 Type 2 compliance, the industry standard in data security. With investors’ best interests in mind, the commercial real estate trend toward advanced cybersecurity will only become increasingly prevalent. 

Embracing Commercial Real Estate Trends

The commercial real estate world is facing a number of headwinds, from rising rates to a cooling economy. Although the market remains steady, growth is expected to move at a more modest pace in the coming months. Firms that capitalize on net new intelligence captured by innovative technology will be better poised to realize these fast-moving opportunities. Sourcing, analyzing, executing and reporting on deals from one platform enables deal teams to surface the most profitable opportunities.

Download this free white paper to learn more about deal management software’s crucial role in a modern investment management firm’s tech stack.

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Matt Carrigan

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