Top 6 Commercial Real Estate Trends for 2023
As we move into 2023, the real estate industry is expected to continue evolving in the aftermath of COVID-19. The prior year was marked by higher interest rates, inflation, and global economic disruptions, setting the stage for stakeholders to rethink their property investments and return expectations. Generally speaking, we think 2023 will see an uptick in development projects as those with longer-term time horizons will look to take advantage of lower acquisition prices and a recent decline in the cost of construction materials, while others will look to take fill the lending gap in the face of a likely credit crunch. Here are the top six commercial real estate trends likely to shape the industry in 2023.
1. Rescue Capital
With higher interest rates likely to stay for 2023 and banks likely to tighten credit in the wake of some prominent bank failures, projects that took on bridge debt the last few years will have a hard time refinancing as those loans come due this year, meaning there will likely be opportunities for preferred equity providers and mezzanine lenders to get attractive returns on otherwise solid assets.
2. More Localized Development
In the aftermath of the pandemic, many Americans appreciate the ability to go out again but also don't miss the days of endless traffic-jammed commutes. Concepts like the “15-Minute City” are becoming increasingly popular, giving people a mix of quiet and convenience. Look for more local development in 2023 as people continue seeking out these communities.
3. Space Utilization
Work from home is here to stay for a lot of people, and developers will continue to reimagine spaces to incorporate in-demand amenities, such as home offices and office nooks. Look for developers to rethink designs to incorporate more flexible spaces and other features to meet the needs of changing buyers and tenants.
4. Incentive Programs
With increased interest rates comes an increased premium expectation from real estate investors. To get deals to pencil out, developers are using programs like Opportunity Zones and affordable housing tax credits to a greater extent. These programs provide benefits to investors, allowing them to offset the increased costs associated with higher interest rates.
5. Office Redevelopment
While the office sector hasn't suffered the great demise predicted by many in the industry, certain markets have changed dramatically. Developers will continue to push cities to rezone some office spaces to residential use, while others will incorporate additional features to existing office buildings to attract tenants and better utilize space.
6. Co-Living
Co-living refers to community-based living with shared amenities. While it fell out of favor with investors in the short term during the pandemic for obvious reasons, high inflation and higher housing costs still make co-living a popular option for younger generations. With developers again looking to juice returns in a high interest rate environment, co-living is expected to make a comeback in 2023.
Conclusion
As the real estate industry continues to evolve in the aftermath of COVID-19, these six trends are expected to shape the industry in 2023. Whether it's the rise of 15-Minute Cities or the continued evolution of co-living, developers, investors, and other stakeholders in the industry will need to stay ahead of these trends to succeed in the coming year.
