The Commercial Real Estate Alpha Site

2023 Commercial Real Estate Outlook – Highlights from Colliers

Trends to Watch in 2023

• U.S. Slides into a Mild Recession: The Fed’s

swift and aggressive monetary policy, coupled

with persistent inflation and slower global

demand, will push the economy into a mild

recession by midyear. While the Fed is likely

to stop hiking rates after its first quarter

meetings, it won’t begin to reverse course

despite moderating inflation until later in the

year or early 2024.

• Inflation Poised to Drop Significantly: Easing

supply chain challenges and falling energy, gas,

and commodity prices will relieve inflationary

pressures. Inflation can then fall significantly

because of lower rents and housing costs,

moderating healthcare costs, and retailers

unloading too much inventory.

• Labor Constraints Ease: Strong employment

growth propelled the economy in 2022, but

the labor market will begin to stall in 2023, and

growth will turn negative by summer. Although

relatively low by historical standards, the

unemployment rate will rise above 4.5%, and

wage growth will drop closer to the Fed’s 2%

target range.

• Consumer Spending Runs Out of Steam: As

the pandemic-boosted household savings rate

falls below pre-pandemic levels, households

will likely curb spending, particularly on

higher-priced goods, as labor market

conditions deteriorate and wage growth

retreats.

• Residential and Business Investment

Weaken: Despite stabilization in the 10-

year Treasury and 30-year mortgage rates,

single-family sales will remain tepid. As pentup

demand eases, higher borrowing costs

and tightening lending standards will cause

business investment to soften as companies

reduce expenses in a contracting economy.

• Housing Affordability: Despite a quick and

dramatic reversal in the housing market by

the end of last year, affordability will remain a

paramount concern. Elevated mortgage rates

will discourage existing homeowners from

moving and sideline many would-be buyers.

Therefore, multifamily demand will persist,

and, limited inventory in most markets will

keep housing costs for owners and renters

elevated.

CRE Trends to Watch

Sustainability and the Bottom Line

As climate concerns take center stage,

attitudes towards sustainability will shift

from wanting to do something to needing

to. According to the Environmental and

Energy Study Institute, buildings across the

U.S. account for 40% of carbon emissions.

While sustainability initiatives are expensive,

they’re becoming non-negotiable for

institutional investors.

Distressed Assets Emerge

The pandemic wave of distressed assets failed

to materialize, as owners and lenders worked in

unison; however, distress will emerge in 2023 in

all asset classes. With the rapid rise in interest

rates, valuations will be challenged upon debt

maturity, forcing owners to put more capital

into their assets. While rescue capital is gaining

traction, many cash-constrained owners and

developers will return their keys to the bank.

Flight to Quality

The flight to quality is happening in the

office sector as employers focus on premium

spaces, not only to bring their employees

back but also to attract and retain top talent

in an ultra-tight labor market. However, as

a recession looks more likely and tightening

regulations push more companies towards

ESG initiatives, trophy assets will outperform

others in all property types.

Multifamily

Trends to Watch in 2023

• Migration Patterns: According to the U.S.

Census, the Sun Belt continues to lead in

population growth, with more than 400,000

new residents in both Texas and Florida in

2022. Population growth leads to household

formation, and in turn, multifamily demand.

• Mortgage Costs: While rates dropped slightly

by year-end from November highs north of 7%,

the cost of a 30-year mortgage is prohibitive

to many buyers, slowing down home sales and

keeping people in the rental market.

• Affordability: Rents have surged in most

markets across the country, stressing renters’

budgets. A recent survey reported by Bloomberg

noted a significant share of Millennials moving

back in with family in the past year in order to

save money and because they couldn’t afford

the rent. Multifamily owners have noticed

stalled household formation.

• Capital Flows: Multifamily has led U.S. sales

volume for eight straight years, catalyzed

by falling interest rates. Investors still rank

multifamily as a top target, but higher borrowing

costs are slowing down sales volume. How far

and fast pricing adjusts will be an important

factor in total sales volume.

For a complete forecast from Colliers, Please visit HERE <——-

On a localized level here on the Gulf Coast of Florida, if you would like to discuss your property, investing, the markets, etc, please visit Dreznin Pappas Commercial Real Estate LLC by clicking HERE <—–