Twin Cities commercial real estate owners have faced many unique challenges over the past few years. Navigating COVID-19’s obstacles proved more challenging than many anticipated, and the market changed dramatically in the course of fewer than two years. The entire CRE industry has experienced monumental change since the pandemic first began.
Between supply chain issues, materials shortages, and massive sell-offs, investors were forced to think on their feet and ride the waves of change. However, the commercial property market has been quite resilient, and for those who weathered the storm and learned from the challenges they faced, there are fresh opportunities.
The experts here at Gonyea Commercial Properties have been closely watching the trends and evolution of commercial real estate in America. Although we can’t predict the future, we’ve studied some of the most solid commercial real estate trends and predictions heading into 2023 – and we’re sharing three of them with you.
2023 Commercial Real Estate Trends
1. There May Be a Slight Decline in Prices
While the commercial real estate market has remained strong in recent years, there are signs that values may be starting to decline. We project commercial real estate prices to see a slight decrease, both nationwide and in the local Twin Cities market.
The country’s current political climate and rising inflation have caused many investors to be exceedingly cautious. As a result, we foresee that commercial real estate prices in 2023 will not rise as quickly as it has in the past two years.
This doesn't necessarily mean that values will drop sharply, but it is important to note that the market is cooling off. For sellers, this may mean more challenges getting buyers to meet their asking prices. Buyers, on the other hand, may have more negotiating power as they look for wise investments.
Another reason we will likely see this modest decline in prices is the decrease in appraisal values. With higher borrowing costs, capitalization rates (cap rates) will likely take a hit and push commercial real estate values down. However, strong job growth in many industries should refresh commercial real estate demand and keep prices from spiraling downward.
Twin Cities commercial real estate investors should expect to see a slight downturn in property prices. However, we’re not looking for a major market correction anytime soon; this should be a small downward adjustment due to the recent spike in interest rates that are affecting returns on investments for CRE.
2. Rent and Tenant Demand May “Normalize”
Based on our expert’s research, the real estate market may be reaching a point of "normalization" in terms of rent and tenant demand in 2023. For the past few years, the market has been characterized by high demand and low vacancy rates, resulting in skyrocketing rents.
The annual index of residential property rent growth had been relatively stable for the past several years at about three to four percent. In 2021, it hit an all-time high of 17%.
We expect to see some normalization in terms of value, rent increases, and tenant demand for multi-family and industrial buildings. With lower volume, higher cap rates, and slowing construction, 2023 looks to bring a more predictable and stable market for commercial real estate tenants.
Spurred on by excessive inflation, government spending, and a host of challenges ushered by the pandemic, rapidly rising rent costs were shaking the real estate industry through 2021 and into 2022. Prospects were slim for families looking to find space to live in major metropolitan areas. This drove many to fan out in search of better housing opportunities.
As more families and companies relocated to smaller markets, supply and demand disparities drove up rent across the nation. Now, there are signs that this trend is beginning to change.
With the pandemic behind us and the economy fighting to stabilize, we should see rental costs starting to stabilize – creating increased opportunity for those looking to acquire commercial real estate in the St. Paul area.
Not without its challenges, 2023 real estate values should rise at a much slower rate. We expect the NCREIF Property index to be closer to its 20-year average in 2023 as opposed to the 20% or more we saw from mid-2021 through mid-2022.
3. Real Estate Technology Will Become More Important
As with most things in today’s world, technology is rapidly changing and impacting the real estate industry. We have no doubt that we will continue to see new real estate technology trends in 2023 and beyond.
From big data and artificial intelligence to the Internet of Things and virtual reality, technology is changing the way that investors, developers, and occupiers interact with the built environment. As technology evolves, so does the way that we invest in commercial real estate.
In order to stay ahead of the curve, it's important for commercial real estate investors to understand how technology is impacting commercial real estate.
We have seen massive advancements in commercial real estate technology in recent years, and 2023 should see these advancements put to use. New real estate technology can eliminate tedious tasks, identify potential assets, and allow the more easy management of facilities.
Technology is making it easier for investors to identify potential opportunities and assess risk. It is also providing occupiers with new ways to find space, manage their operations, and interact with their customers.
As we become increasingly reliant on technology, the need for physical space will continue to change.
With more people working from home than ever, the landscape of the commercial real estate industry is evolving. Many people are focused on making lifestyle changes that allow for less time at a physical work location, and that has significantly altered how they view both homes and offices.
Various forms of cutting-edge real estate technology offer a vital lifeline to investors, tenants, and occupiers alike. Modern technology covers specific needs and solves problems in virtually every phase of the real estate journey – making real estate tech an essential tool in the kit of any commercial real estate buyer.
Whatever the future holds, one thing is certain: technology will continue to play an important role in shaping the commercial real estate landscape.
How We Help Commercial Investors
Gonyea Commercial Properties is a trusted partner for commercial investors. We offer a full range of services to help our clients succeed, from market analysis and site selection to representing buyers and sellers in commercial real estate deals.
We are vigilant about staying on top of real estate trends and maintaining a hyper-focus on local movements in the Twin Cities region. We are proud to be the leading Twin Cities estate experts, and we’re here to provide expert guidance.
Our team has the experience and expertise to handle even the most complex projects, and we are committed to providing the highest level of service possible. Whether you are looking to buy, sell, or lease commercial property, Gonyea Commercial Properties is here to help. Contact us today to learn more about how we can help you achieve your investment goals.