It’s a tumultuous time to be a Commercial Real Estate (CRE) investor. An unprecedented rise in interest rates paired with the continued popularity of remote work has created an environment that’s markedly different from that of a few years ago.
In a zero-interest rate environment, huge amounts of capital flowed into various CRE asset classes, from office space to self-storage. Today, however, the zero-interest rate punch bowl has run dry. Investors are being forced to work much harder to find attractive opportunities, while also navigating complex challenges within their existing portfolios.
In an industry that’s always been complex, the difficulty level has been ratcheted up several levels. Success is still possible but requires a different approach. To pivot your strategy and build for enduring success, it’s important to understand some of the key trends in the CRE market today.
In this overview, we’ll run you through several of the most notable. At G-Squared Partners, we’ve seen first-hand how these trends are affecting our clients and have dedicated significant amounts of time to working through the long-term ramifications for CRE investors.
G-Squared Partners offers outsourced CFO, accounting, and bookkeeping services to investors and operators across the CRE industry. Our team brings experience in areas such as due diligence, long-term forecasting, and more. Contact us today to learn more about how we can support your business.
Four Key Trends for Commercial Real Estate Investors to Be Aware Of in 2023
The CRE industry is fast-moving – now more so than ever. With relentless rate increases, economic uncertainty, and constantly shifting consumer behaviors, it’s never been more important for investors to stay up to date on current market trends.
Below, we review four of the most impactful trends that should be top of mind for CRE investors in 2023 and beyond. As you read through these summaries, consider how they affect your own portfolio. While, clearly, there are negative impacts associated with these trends, they also present new opportunities for savvy investors to capitalize on.
Vacancy Challenges Are More Complex Than They Appear
Two of the CRE asset classes that were hardest hit by the pandemic were office space and retail. Thanks to long leases, many landlords may still be collecting lease payments, but with many office buildings still at least partly empty, renegotiating leases may come with challenges.
Ancillary revenue sources have been hard-hit too. While rent payments may continue to be made, when employees don’t come into the office, they cancel monthly parking passes – a reliable, profitable source of revenue for many office building owners. While more companies are now requiring employees to come into the office at least a few days a week, these incremental revenues are far from where they were pre-pandemic.
In response, some investors may be looking to exit their office space holdings. There have even been instances of large, institutional investors admitting defeat and handing struggling assets over to their lenders. But it’s not always this simple. Banks may not be willing to accept these assets, instead preferring to work with owners to adjust loan terms.
Power is Shifting From Landlords to Tenants
With high levels of vacancies, particularly in the office space sector, the balance of power has shifted. Tenants now find themselves with more leverage than perhaps ever before when it comes time to renegotiate their lease.
Many tenants are shifting to smaller office spaces while also seeking to lower the price per square foot they pay to landlords. Landlords, especially those that hold Class B or C office real estate, have little leverage in these negotiations, and the combination of lower rates and less need for office space significantly handicaps investment returns.
Compounding this further is the changing role of the office in the American workplace. Employees no longer want to commute downtown to sit in their cubicle all day – they can do that just as well at home. Instead, teams come into offices to collaborate and work together. For businesses to do that effectively, their office space often needs a total rethink.
For CRE investors looking to retain current tenants or attract new ones, these trends might necessitate upgrades. It can often be difficult to make an investment case for these renovations, which could easily cost tens of thousands of dollars, but without them, investors will likely continue to bleed tenants. Besides the ROI of these investments, investors also face the question of how to finance them.
Borrowing Costs Continue to Rise
Compared to much of the previous decade, borrowing costs are now sky-high for CRE investors. In an effort to battle inflation, the Federal Reserve has overseen ten consecutive interest rate increases, and while they paused in June 2023, it’s likely more will come later this year.
With borrowing costs not expected to drop anytime soon, investors are having to leverage creative strategies to fund new capital investments. Some investors are funding acquisition costs out of their own pockets, while others are leveraging their wider portfolio to seek more favorable terms from creditors.
Closely monitoring cash flow, budgets, and performance against long-term forecasts on a routine basis is now non-negotiable for CRE investors. This demands a higher standard of financial record-keeping – an area where many CRE investors could benefit from the support of an outsourced CRE accounting team.
The Emergence of New CRE Growth Verticals
While many of the trends currently impacting the CRE industry have negative implications for investors, there are still plenty of opportunities out there. Many areas of CRE have remained strong: the industrial sector continues to grow strongly, and many regional markets continue to flourish.
It can be valuable for investors to broaden their focus into additional CRE growth verticals. At G-Squared Partners, we’re seeing significant growth opportunities in areas including self-storage facilities, student accommodation, and multifamily. Exploring these opportunities, remaining disciplined, and continuing to keep track of macro trends is a vital step for CRE investors to ensure they stay abreast of new opportunities to grow their portfolio.
G-Squared Partners: Experienced Advisors to the Commercial Real Estate Community
Challenging times call for cool heads – and experienced advisors. At G-Squared Partners, we’re proud to have served as outsourced finance leaders for investors and operators in every area of the CRE industry.
Our team has significant experience in a variety of tasks, from conducting due diligence on new investment opportunities to completing pro forma financial statements that illustrate how a property might perform on a long-term basis. With the ability to handle everything from billing and collections to negotiating complex debt packages, our advisors are equipped to help you navigate the relentless challenges of today’s CRE market.
To learn more about how G-Squared Partners can support your commercial real estate business, contact us today.