Commercial Real Estate Forecast For 2023

There are mixed reports, some with positive data points and some with negative data points suggesting 2023 will be a challenge for commercial real estate in Austin, Central Texas, and the Unites States as a whole.  Let’s dive right in.

Some, like CBRE chief economic advisor Richard Barkham,¹ think a potential recession will not be particularly deep.  Multiple surveys of corporate executives suggest corporate finances are in good shape with employers willing to avoid layoffs to avoid losing employees in a tight market for skilled labor.

Another positive sign for the future is that consumer confidence has “stabilized/moderated”, with average household debt being low compared to the onset of other previous recessions. These factors suggest a moderate downturn with unemployment maxing out at 6 to 7 %.  Others suggest inflation will be significantly lower by the 2^nd half of 2023, which will then trigger falling interest rates and the beginning of a new cycle of growth and asset appreciation that will last into the 2030’s.

Barkham thinks the office market will need to continue to adapt because of the solidifying hybrid working environment.  Retail is continuing to adapt, so expect some positive absorption and income growth.  Hotel/Hospitality is on the uptick and should continue to do so in 2023.  Life sciences’ appetite for real estate is cooling off post covid since research, development, and the manufacturing of medical devices and medications is going back to a more pre-covid pace.  Industrial is still strong but settling down some due to growth recalculations from logistic companies like Amazon and other ecommerce companies.

JP Morgans Al Brooks² also suggests challenges ahead citing several market observations.  For one, he thinks retail is at a crossroads.  Neighborhood retail will be in good shape while malls will continue to be converted to multifamily/multi-use. City center retail will continue to struggle due to higher rents and lower foot-traffic as people continue their hybrid work from home habit.  Office is unclear since vacancies are actually not below pre-2019 Q4 pandemic numbers, but cash flow growth may be lower than forecasted.  Multifamily is currently the highest performing asset class primarily because they can adjust rates annually, if not monthly. Industrial goes, as ecommerce goes, and is still very strong with more and more consumers relying on at-home deliveries of goods.

Not to get too economy “wonky” but the overlying macroeconomic factors Brooks sites that will steer the direction of commercial real estate in 2023 will be geopolitical, inflation, and interest rates.   The geopolitical aspect is the war in Ukraine and sanctions against Russia that will continue to cause supply chain disruption.  Inflation in the US is at 7.75%, a rate that hasn’t been seen since the 1980’s. And finally, Fed interest rates are running at 3.75% to 4%, which are the highest rates since 2008. The Feds will continue to raise interest rates until they see a market reduction of ~ 2%. This cause will affect the market by weakening fundamentals and higher costs of capital will generally lower asset values.

Keep an eye on these factors as we move into 2023.

Bottom line for you is to be cautious and get professional advice before you enter into a commercial real estate lease or purchase; whether it’s an investment or owner occupied.

As always, I am available to discuss your needs at any time.  You can reach me at 512-736-5933 or oddo@toweratx.com

 Source Citations

1 – Barkham,Richard 2022 “U.S. Real Estate Market Outlook 2023”

2 – Brooks, Al 2022 “2023 Commercial Real Estate Outlook”