Where to Find Opportunities as Economy Slows 

A new report explores the varying paths ahead for investors in 2023.

Image by Gerd Altmann from Pixabay

Investors are preparing for a challenging year, as weakening fundamentals and higher costs of capital will affect most commercial property sectors, according to CBRE’s new U.S. Real Estate Market Outlook 2023: Opportunities Amid a Slowing Economy.

Office sector’s uneven recovery

Jessica Morin, CBRE research director and head of office research, notes that the office sector’s “slow and uneven recovery” as the pandemic winds down continues to deepen the gulf between prime office buildings and second-rank properties. This in turn is creating challenges for those lesser-quality assets, even as both landlords and occupiers try to adapt to new working patterns.

In 2023, Morin wrote, tenants will continue to shed underused office space, stacking even more availability onto an already generous amount of available supply.


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Although most companies see office attendance as crucial, she said, “Office utilization rates likely won’t meet employer expectations next year.” The result might be a new equilibrium in which typical office space per employee is up to 15 percent lower than before the pandemic.

As older buildings struggle to attract tenants, a glut of obsolete vacant space could increase the average office vacancy beyond the historical structural vacancy rate of about 12 percent caused by the supply of less desirable office space. While this might be mitigated by the removal of some undesirable space through demolition or conversion, Morin commented, “feasible office conversion opportunities represent a negligible share of total U.S. office inventory.”

Life science space market to moderate

In his commentary on the life science space market, Ian Anderson, CBRE senior director of research and analysis, predicts a cooling, or normalizing, process in which the economic slowdown moderates the sector’s recent rapid expansion.

He also notes, however, that life science is likely to retain its relative resilience as “Pandemic-fueled demand and capital infusion … give way to more normal market conditions, with better opportunities for occupiers.” As the business cycle turns, expect to see more small bioscience companies seek partnerships or agree to mergers and acquisitions with larger life science companies.

And though “the ongoing reduction in venture capital funding and dearth of equity financing is causing many life science companies to slow their expansion,” Anderson adds that federal policymakers are doing more than ever in terms of life science investment. Proposed National Institutes of Health funding is up substantially for fiscal 2023, and that’s in addition to the Biden administration’s $2 billion in investments to expand U.S. biotech and biomanufacturing.

Industrial’s resilience

James Breeze, CBRE senior director and Global Head of Industrial & Logistics Research, comments that industrial demand will stay strong by historic standards, though leasing activity is expected to moderate in 2023. Still, demand is likely to keep up with supply in the new year, making 2023 the 13th straight year of positive net absorption, along with near record-low vacancy and solid rent growth.

He delves into the supply chain, as U.S. companies diversify their sourcing, to try to mitigate such possible disruptions as shutdowns at Chinese ports, labor issues at U.S. ports and the war in Ukraine. One strategy many are adopting is “China Plus One,” in which a company relies less on China to supply products by adding other nations to their supply chain.

In parallel with that, Breeze explains, other U.S. companies “will fully shift manufacturing to other Asian countries, while others will onshore manufacturing to the U.S. or nearshore to Mexico.”

Amid all this change, import trade will arrive through more U.S. ports, “stimulating demand for nearby industrial space and along direct transportation routes to and from Mexico,” benefiting such markets as Savannah, Ga., Charleston, S.C., Houston, Baltimore, Phoenix, Atlanta and Greenville-Spartanburg, S.C.

More tactically, while Breeze expects industrial leasing to decrease by 10 percent to 15 percent in the coming year, to about 725 million to 750 million square feet, third-party logistics should lead leasing, bumping their share of leasing activity to 40 percent by midyear.

Retail’s bright spots

And on the retail side, Brandon Isner, CBRE’s Americas Head of Retail Research, says the sector could be “a bright spot of 2023,” with brick-and-mortar sales continuing to rebound, an ongoing consumer preference for shopping in stores and a lack of new supply.

As to the latter, he points out, “Retail deliveries have reached record lows over the past three years, a trend that likely will continue in 2023.” Further, 10 million square feet of retail space has been removed from the market just in the past five years.

The counterpart to the loss of retail space is retail developers’ and investors’ focus on redesigning and redeveloping their existing space, especially in prime trade areas, “which are experiencing record-high occupancy levels and asking rents due to strong demand,” Isner wrote.

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