Three CRE asset classes to pay attention to right now
Three CRE Asset Classes to Watch Right Now
Investors in the commercial real estate industry are eager to reevaluate their strategies to meet the challenges of an ambiguous future as the Federal Reserve keeps raising interest rates. Fears of a probable recession, rising capitalization costs, and an economic environment changing how various asset classes have performed in prior decades versus the current environment are all issues investors face. All sectors of the real estate market are experiencing a slowdown due to the increased cost of capital, however, some asset classes remain a better bet for investors.
So where are investors parking their money? Here we’ll examine three commercial real estate asset classes to watch for the remainder of 2023.
Industrial
Per Yardi Matrix, national in-place rents for industrial space averaged $7.15 per square foot in March, an increase of 7.1% from the previous year. The national average rent increased by 14 cents, or 2.0%, in the first quarter of 2023. At 3.9%, the national vacancy rate for March remained constant from the previous month. Despite a slowdown in leasing in some segments of the market and the recent and ongoing surge of supply that has come online, industrial occupancy is still strong. The average price is still rising despite a slowdown in sales. It reached $133.77 per square foot in Q1 2023, above the $128.58 average in 2022 and setting a record for the highest quarterly price per square foot ever.
Furthermore, according to a national assessment from Colliers, 60% of investors surveyed said they were considering investing in industrial properties in 2023. Under-supplied housing markets and low vacancy rates across industrial assets help underpin capital values and support income growth. Equally, industrial & logistics assets will continue to absorb market share, with investor interest in first-mile assets on the rise as the near-shoring of Foreign Direct Investment (FDI) becomes a reality.
Multifamily
Longly considered a mainstay for CRE investors, healthy property fundamentals are being fueled by the ongoing housing shortage and the fast-growing cost of homeownership. Indeed, multifamily continues to be an attractive investment choice.
Multifamily property fundamentals are stable, although financial markets continue to be volatile as a result of recent bank failures. During the first quarter of 2023, rents and the national occupancy rate remained the same, while in March, rent increased in 21 of the top 30 metros according to the Yardi Matrix.
“At Built, among our 260 lenders active in new construction finance, we continue to see a steady flow of new loan commitments with a focus on workforce and LMI-targeted projects. All facets of the pre-development and construction process receive preferential entitlements and favorable tax treatment, de-risking proforma performance for both investors and lenders,” says Built Technologies Senior VP of Commercial Real Estate Solutions Jim Fraser.
Rent growth in 2023 is anticipated to be modest as consumers will likely be constrained by high inflation and growing affordability concerns. Per the Yardi Matrix, a simmering of the multifamily market is not yet anticipated. Some renters are unable to purchase a single-family home due to high single-family home prices and mortgage rates, and consumer balance sheets are still strong (for the time being).
Grocery-Backed Retail
Thus far in 2023, positive consumer spending at stores that sell necessities contrasts the overall sales momentum. According to Marcus and Millichap, food and personal care products are prioritized by consumers. With sales up 0.3 percent in March, health and personal care retailers saw growth for a third straight month. Simultaneously, there was a slight increase in grocery store spending. The disparity between the performance of these two segments and overall retail spending suggests that consumers are prioritizing necessities over expensive items.
Foot traffic increased at most store types, reaching or even exceeding pre-pandemic levels as a result of changing consumer preferences. In-store purchases will probably stay high as the holiday shopping season approaches, supporting the industry’s growth in the final three months of the year.
Despite the promising outlook, worries about an impending recession could cause consumer spending to slow down once more shortly. Retail investors should exercise caution until the uncertainty subsides.
When opportunity abounds, make sure you’re ready.
Information for commercial lenders is frequently divided between spreadsheets, shared drives, and core accounting systems—all of which require a lot of time to manage and are vulnerable to human error. Asset managers and loan administrators often get stuck repeating work due to their focus on manual processes and outdated data.
What is keeping commercial real estate investors up at night? The answer is simple yet traditionally tough to confront. Do you have true visibility into the health of your CRE investments? In most cases, the answer is an unfortunate “no”. With that said, the biggest risk facing CRE businesses today isn’t necessarily the market–cycles come and go–it is the disconnected business intelligence scattered across disparate data silos which impairs prudent and informed decision-making.
With the advent of modern data management solutions, chisel and stone are no longer acceptable practices for managing risk. It is time to gain control of your commercial real estate investments with Built’s Deal Management solution which is purpose-built to empower CRE workflows and harness critical business intelligence from all of the activities already occurring in your business.
Commercial real estate lenders can manage participations and syndications, LIHTC, and other complex capital stacks with the help of Built’s Construction Loan Administration Suite. Streamline your workflow by centralizing all of your investment data in the cloud with Built for Deal Management.
Ready to take the next step?
Sources:
https://www.colliers.com/en/research/2023-global-investor-outlook
https://www.marcusmillichap.com/research/research-brief/2023/04/research-brief-april-retail-sales
https://www.yardimatrix.com/publications/download/File/3786-MatrixIndustrialNationalReport-April2023