This blog post was last updated on May 22, 2023 with new information about the latest commercial real estate trends.
While the post-pandemic recovery saw record funding levels and investment volume, commercial real estate continues trending toward a steep slowdown. Macro headwinds, which initially slowed deal flow in the second half of 2022, have now become gale force winds. As buyers battle inflation and high capital costs, transaction volumes remain low. Many investors have put their pencils down, waiting for the turbulence to subside while building stronger data-driven efficiencies to react as the market cycle flips and opportunities emerge.
Following a historic sequence of rate hikes, the Fed raised interest rates yet again to 5-5.25% in its tenth increase in one year in May. According to the Bureau of Economic Analysis, U.S. GDP increased at a modest rate of 1.1% year-over-year (YoY), while CBRE claims that YoY CRE investment volume fell 57%. It’s clear the CRE sector is still enduring the symptoms of a challenging market environment.
Nevertheless, fundamentals behind certain sectors like multifamily and industrial remain strong. Some investors are pursuing emerging opportunities with a close eye on market data, relying more than ever on deal management software to uncover profitable opportunities before the competition.
- Commercial Real Estate Financial Trends
- Commercial Real Estate Market & Asset Class Trends
- Commercial Real Estate Technology (Proptech) Trends
Commercial Real Estate Financial Trends
1. Commercial Real Estate Investment Decreased by 57% YOY in Q1
Global volatility, falling valuations, banking turmoil and broader macroeconomic headwinds have dramatically slowed CRE investment volume. According to CBRE, annual investment volume in CRE fell by 57% to $78B in Q1.
Despite nearly market-wide headwinds, select sectors benefited from positive trends and ultimately performed well. Multifamily, industrial and retail led the market in total transaction volume, totaling $25B, $18B and $17B, respectively. The LA market saw the highest sales volume, while the NY market trailed closely behind in the second spot.
Institutional investors and international investors purchased the most real estate, whereas private investors and REITs sold more than they purchased. Many firms, even those investing in favorable markets like multifamily and industrial, are waiting out the storm to sail in smoother waters ahead.
2. Commercial Prices Have Declined by 15% Year-over-Year as of May
According to Green Street’s Commercial Property Price Index, prices dropped by 15% over the past year as of May, following a peak in Q1 of 2022. According to data from the price index, institutional quality building prices have dipped below pre-pandemic prices for the first time. Rising interest rates, as well as sales in financial markets, have largely dampened commercial prices.
According to RCA’s property price index, commercial prices continued to fall in March of 2023. Apartment prices saw the steepest decrease at 10.3% YoY, while retail fell 5.8%. Suburban offices fell by 5.6%, while central business district office pricing fell by only 2.9%. The RCA property price index fell by 8% over one year.
CBRE’S H2 2022 Cap Rate Survey, which measures sales comps from July to December, found that professionals expect significant cap rate expansion across all sectors, with the exception of high-end hotels. However, some experts expect it could end soon.
While this aggregation reflects market conditions in aggregate, it’s important to note that other sectors may see unique trends.
3. The Flight to Quality Continues
Housing shortages continue to be a boon for multifamily and SFR, but other markets are experiencing a flight to quality as investors vie for Class A properties. As the eCommerce boom and a shift toward hybrid policies decrease the need for space, building quality has quickly become a real estate trend at the top of the list of considerations.
According to a report published by Cushman and Wakefield, building amenities and proximity to public transportation are highly desired by prospective tenants.
4. Commercial Real Estate Firms Trend Toward Cutting Costs
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.
Firms continue to search for new line items to cut, making efficiency a top priority. Technology that streamlines processes and centralizes information will persist as a real estate trend. Once the market rebounds, firms that have built efficiencies will be better positioned to win as opportunities emerge.
5. Rental Growth Across Major Property Sectors
Macro trends have impacted sectors in different ways, yielding various results when it comes to rent growth.
Multifamily saw rent growth increase by 2.5% over one year, reaching the lowest growth levels since early 2021. Office, on the other hand, saw even lower growth at 0.9%, as demand remains low and vacancies reached new highs. Industrial rent growth continued to outperform, reaching 10.3%, while warehouses reached 11.7%. Finally, retail saw 3.8% rent growth over the last 12 months.
Among other factors, low rent growth has caused some investors to remain on the sidelines, awaiting a clearer trend toward a real estate market recovery.
6. Commercial Real Estate Trends Toward “Pencils Down” Mode
As high capital costs and ongoing inflation stifle transaction activity, the commercial real estate industry has largely shifted toward pencils-down mode, biding time until borrowing costs decrease and investments are viable.
Large players with cash on hand, however, have enjoyed the luxury of continuing to invest via all-cash transactions. Players of all sizes, meanwhile, continue to invest in select markets.
Across the board, many firms view now as the right moment to build data-driven efficiencies to react precisely when the market turns up.
7. CRE Lending Drops Significantly in Q1 2023 as Banks Continue Lead, Despite Private Credit Gains
While nonbank lenders like private capital firms specializing in debt origination have seized more opportunities in a market mired by high risk and inflation, lending activity overall has slowed. The CRE Lending Momentum Index declined by 33% quarter-over-quarter (QoQ), and 53% YoY.
Overall, banks were the most active segment of players, even as private credit players capture greater market share.
8. Commercial Real Estate Valuations Fall as Transaction Volume Stagnates
Rising vacancy rates and resulting demand for specific property types have driven a decline in some commercial real estate valuations, particularly in the office market, according to the Financial Times. Banks have urged owners to prepare for declines in portfolio value and debt losses. While many experts are optimistic about an imminent rebound, this commercial real estate trend could dictate market activity for years to come.
Even Brookfield, one of the largest commercial real estate owners, saw a drop in portfolio value on the closing of Q1.
9. 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. In some ways, this is tied toward the market-wide flight to quality.
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.
OSCRE is a corporate member organization committed to standardizing real estate data, one of its goals being the fulfillment of ESG standards.
10. Investors Audit and Strategize Around Lender Exposure Amid Banking Turmoil
Recent banking turmoil across Silicon Valley Bank, Signature Bank and others have sounded the alarm for investors. The first bank runs to transpire at digital speed have underscored the need to manage risk with efficiency and clarity. Consequently, another commercial real estate trend that emerged in the wake of this turmoil is rapidly auditing exposure to capital sources, partners and other criteria.
Purpose-built technology is helping investors to gain the level of visibility required to mitigate risk in today’s challenging market. For example, Dealpath’s deal management software enables firms to view their pipelines and portfolios broken out by lending source.
If you can react to risk in real time, you can stay a step ahead of competitors who might opt to wait for news to hit the headlines.
11. Creative Solutions to Tightening Financial Markets and Exploring Emerging Opportunities
Rising interest rates have become one of the most prominent commercial real estate trends throughout 2022 and into 2023. In May, Fed policymakers announced plans to raise the central bank’s overnight interest rate to an upped benchmark range of 5-5.25%.
Tightening monetary policy has increased borrowing costs and limited available financing opportunities for CRE investors.
While many transactions remain off the table, investors are taking actions to strengthen their foothold. For example, reducing leverage and moving up the capital stack to improve seniority and secure favorable terms can minimize risk. Similarly, investors that are overweight on certain assets can take steps to alter their portfolio composition.
Commercial Real Estate Market & Asset Class Trends in 2023
12. 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 2026, e-commerce is expected to account for 25% 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 established giants like Bed Bath & Beyond have filed for bankruptcy.
While the prominence of retail might continue to decline, it won’t fade away entirely. Instead, the role of physical stores is changing. 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.
Grocery-anchored retail continues the trend of outperforming other segments of the retail sector, benefitting from a consumer base that has not defaulted to eCommerce. Only 15% of grocery sales can be attributed eCommerce, according to JLL. 2022 transaction volume for grocery-anchored retail rose 16% over 2021, marking the second consecutive year of growth.
13. Mall Declines in Popularity, As Repurposing Continues
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.
As firms continue to shutter malls in the wake of eCommerce’s boom, a real estate trend toward commercial redevelopment has emerged. Blending residential units with other asset classes eases housing woes, while offering the all-important amenity of convenient shopping. According to the ULI, targeting existing malls for multifamily space also boosts sustainability by avoiding construction on greenfield sites.
14. Industrial Is Past Peak Performance, but Remains Strong
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. While demand has slowed since peaking in the early pandemic, the vertical continues to outperform others.
According to the NAR Commercial Market Insights April 20223 Report, Dallas had the highest 12-month absorption levels, followed by Chicago and Houston. Los Angeles had the slowest 12-month absorption.
Industrial saw the second lowest vacancy rate behind retail in Q1 of 2023. Rent prices saw high YoY rent growth at 10.3%, including 11.7% in the logistics niche.
15. Slowing Down from Peak 2021 Growth, Multifamily Continues to Benefit from Strong Fundamentals
Investors traditionally view multifamily as a relatively low-risk investment, given the constant need for affordable renting space, especially in cities. Post-pandemic relocation trends pushed multifamily performance to a peak in 2021. Now, inflation, layoffs and other recessionary signals have slowed that momentum, while YoY performance remains strong nonetheless.
Vacancy rates increased from 5% in Q1 2022 to 6% in Q1 of 2023, taking the vertical closer to pre-pandemic levels. Even as rents rise, growth levels have also slowed from pandemic peaks, showing only 2.5% YoY growth in Q1 of 2023. Rent growth remains strong in Sun Belt cities like Knoxville and Fayetteville, while major city centers like NY, Austin and Denver maintained the highest 12 month absorption rates.
According to Newmark, 2022 saw the second highest multifamily investment sales volume on record, at $294.1B.
16. 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. Recent turbulence has presented some short-term challenges to life sciences, but the industry’s countercyclical nature will present a path forward. According to JLL’s 2022 real estate life sciences lab outlook, investment in innovation and advanced modalities continues to be a boon for the CRE sector.
The life sciences markets that showed the strongest performance in 2022 were Boston, San Francisco and San Diego.
17. Office Demand Low Amidst Ongoing Headwinds
Perhaps the most prominent and enduring commercial real estate trend sparked by the pandemic is the transition to remote and hybrid workplaces. Demand decreased this past quarter, resulting in an increase in the total number of spaces available in the market. Vacancy rates increased in Q1 of 2023 to an all time high of 12.9%, including a 5.6% increase in rates for Class A buildings.
Tech hubs like Houston, Dallas and San Francisco saw the most significant increase in vacancy rates, particularly as layoffs continue.
Office leasing slowed for the third consecutive quarter in Q1 of 2023, seeing a 9.8% decline from Q4 in 2020. A record number of lease expirations did, however, carry a slight boon for lease activity. One third of leases are set to expire between 2023 and 2026, which will continue to influence the market in the years to come.
18. 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.
19. 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 and student housing and life sciences have gained momentum. From 2020 to 2021, the percentage of total CRE investment on operational spaces doubled to 12.3% in 2021. According to Green Street’s U.S. Sector Outlook Report, senior housing rent and occupancy growth could average 6.5% over the next five years. Over the last ten years, self-storage construction has increased by 926%.
As the share of older Americans needing living facilities, this commercial real estate trend will likely gain steam.
20. 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 announcing it will dedicate another $1 billion on top of its existing $6 billion single family home rental portfolio. By some projections, it could be the fastest-growing sector of the American housing market.
Single family rental has not, however, been immune to headwinds across the CRE industry. Demand softened as inflation woes and recession signals caused a wider shift. Rent growth has fallen across the national market, while certain submarkets driven by locational advantages and other real estate trends continue to perform well.
Investors are increasingly noticing ample opportunity in this sector, especially as 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
21. 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 pipeline data and information in one place to systematize data-driven investment decisions. 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.
22. Investors Will Continue to Make Faster Decisions as Data Efficiencies Rise
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 real estate investment management software, investors will continue to build operational efficiencies.
23. 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.
Commercial Real Estate Trends: Speeding Up During a Slowdown
As investors wait out the storm, many have looked inward to build operational efficiencies and make data-driven investment decisions once the market turns.
Watch our on-demand webinar to learn how your firm can weather the storm and speed up during a slowdown.