The commercial real estate market is valued at nearly $21 trillion, and there are potential challenges on the horizon that could have significant consequences.

Office vacancies in San Francisco have seen a rise, increasing from a pre-pandemic rate of 6% to 15% in 2022. Employees now spend 25-35% less time in the office compared to before the pandemic, resulting in a 15% decrease in office space demand per employee. Additionally, around $450 billion in loans will become due over the next four years, and the market is facing the reality that cheap money is no longer available. 

New York’s commercial real estate sector shows mixed results. Colliers Manhattan office leasing volume has grown by 26% in 2023, reaching 9.23 million square feet, and the year-to-date leasing volume totals 24.17 million square feet, nearly a 50% increase compared to the same period in 2021. Luxury retail has experienced growth in Manhattan, with Givenchy, Hermès, and Gucci acquiring new retail spaces. 

Let’s look at the different types of real estate. Retail properties include general purpose shopping centers that offer a variety of items like clothing, food, and electronics. Multifamily properties encompass various options such as duplexes, triplexes, and quadplexes, containing two, three, or four units. Garden apartments have more than four units and offer considerable access to garden space or a lawn. Mid-rise apartments consist of 5 to 12 stories in one building, while high-rise apartments have 12 or more.

Office properties are categorized from Class A to D. Class A properties are the newest and most luxurious spaces located in prime locations, while Class D properties require complete remodeling or demolition. Industrial properties serve as manufacturing, distribution, and/or logistics facilities. They are classified into three main categories: light assembly, flex warehouse and bulk warehouse.

Hotels/hospitality properties include full-service hotels offering comprehensive services with onsite restaurants, fitness centers, and spas. Limited service hotels provide basic amenities like a grab-and-go market and a small fitness room. Extended stay hotels are designed for travelers needing additional amenities such as small refrigerators, kitchenettes, and cooking facilities.

Other types of commercial real estate, including land such as agricultural fields for farming or pasture, infill plots adjacent to developed properties, brownfield sites recognized for their environmental history, mixed-use properties blending various real estate forms, and special-purpose buildings like stadiums and amusement parks, are all worth considering alongside these ones.

Market uncertainty has led many investors to pause their investments and wait for market corrections. However, the US market is generally considered stable with good growth prospects, outperforming other regions with an average annual return of 10.4% and achieving a portfolio return of 19.1% in 2021, making it an exceptional year. The market is currently in a phase where it awaits potential opportunities, which could emerge in the next 6 to 12 months. Rising interest rates are another challenge, with seven rate increases through December 2022, causing investors to consider the impact on their investment decisions. 

Shifting portfolio values reveal preferences among active investors in the Americas, with a focus on value-add (81%), opportunistic (73%), and core (54%) strategies. Industrial, multifamily and single-family rentals, self-storage, and data centers continue to generate interest. Additionally, layoffs in New York businesses have the potential to reduce demand for commercial real estate, as seen with companies like Twitter, Meta, and Goldman Sachs announcing significant layoffs. Office occupancies in New York City have plateaued at a post-pandemic high of 47%, and real estate sales in the city could decrease by 15.9% from 2022 to 2023, reaching $101 billion.

Despite these challenges, the commercial real estate market still offers opportunities for those willing to embrace the associated risks.

Data centers and industrial real estate are expected to demonstrate resilience in the coming year. The hotel sector will continue its recovery. Office occupancy may experience a temporary increase of 10% as employers request employees to return to the office, although this phenomenon may not be long-lasting. The ongoing housing shortage and high demand for suburban homes will attract investors to multifamily properties. 

Landlords are considering converting empty office space into residential units, as demonstrated by Silverstein Properties’ announcement of a $1.5 billion capital raise for the conversion of Manhattan office buildings into residential housing. Demand for industrial space is expected to persist due to supply-demand imbalances and limited land availability. Furthermore, hotel occupancy tax revenue in 2023 is projected to reach $514 million, reflecting a 49% increase from 2022.

Orange County Commercial Real Estate