CRE In 2023 'Won't Be Pleasant' As Bevy Of Headwinds Bears Down: CBRE

Next year is likely to bring a downturn for most asset classes in commercial real estate, according to CBRE's 2023 United States Real Estate Outlook, which predicts increased vacancy rates and curtailed demand followed by a rebound the year after.

“Most areas of the U.S. economy are not as overextended as in past downturns,” CBRE Global Chief Economist and Global Head of Research Richard Barkham said in a press release. “Next year won’t be pleasant, but neither will it be a disaster like the Global Financial Crisis. The economy will stabilize and start to improve in 2024. The recovery from there might surprise on the upside.”

The report looked at multiple sectors, including capital markets, office, industrial and retail, and one of the most notable observations is the expected challenges ahead for office.

The report suggests that remote work’s staying power will persist, resulting in 15% less office use on a per-employee basis for the foreseeable future. Additionally, the flight-to-quality trend will persist, as companies continue downsizing office footprints, opting for higher-quality spaces and putting the owners of Class-A office buildings in a better position than those operating spaces perceived as Class-B or C.

The leasing environment has already shifted dramatically, resulting in longer terms and bigger tenant improvement packages to court occupiers. 

Industrial will also slow compared to its boom in 2022, with a 10% to 15% decline in construction starts expected in 2023. Demand is nevertheless likely to remain steady, with a 13th year of positive net absorption predicted. The industry’s vacancy rate is also expected to increase by 30 to 60 basis points as some of the country's development pipeline delivers but will still hover below its 10-year average. 

Pent-up construction activity is expected to be a boon to the retail market, which earlier this year reached its lowest availability rate since 2005, according to a separate CBRE report. Like the office market, retail construction will trend toward upgrading existing facilities rather than ground-up construction, and TI packages will also be on the rise. 

The multifamily segment will continue to see some hard times with cap rates expected to increase further in 2023. Cap rates rose from 75 to 100 basis points this year, according to the report. CBRE predicts that rents will increase by 4%, and construction completions are expected to see a slight uptick but remain below the 20-year average of 5%. 

Apartment affordability is likely to continue to be a concern nationwide. 

Data centers will be heavily impacted by the limited availability of land and power supply, but operators are expected to look to secondary markets for expansion opportunities. The asset class is also predicted to see an increase in new cooling technologies, with an emphasis on cost reduction and sustainability.

Northern Virginia can be expected to continue its dominance of data centers, and the average monthly asking rent is expected to increase. 

The cooling of venture capital in the life sciences segment will likely lead to a slowdown in growth, but the report suggests that this will lead to more options for companies seeking lab space in tight markets. The report's authors also predict that increases in federal funding will serve as a counter to decreases in venture capital, while industry partnerships will continue to serve to boost the asset class. 

Finally, the hotel industry is expected to see a mixed bag of ebbs and flows, as revenue per available room is projected to increase by 5.8%, a significant slowdown from the 29% hike experienced in 2022. 

The easing of travel restrictions in Asia will serve as a potential booster for the industry, along with increases in group and corporate travel, but CBRE is projecting a drop in hotel transactions, which it attributes to the rising costs of utilities, insurance, labor, property and capital.