Commercial real estate’s path to recovery has been pushed back into 2024, given the fallout from rising interest rates and disrupted deal flow. There is long-term optimism for commercial real estate, however, particularly for the multifamily and industrial sectors, according to the LightBox 2023 Mid-Year Sentiment Report.
The report, which tracks sentiment from investors, brokers, lenders, appraisers and others, notes a diminished outlook for the remainder of 2023, but optimism about long-term opportunities. This optimism reflects activity and interest levels in several Midwest markets.
“Our investor clients are struggling with making deals work given today’s price uncertainty and recessionary concerns,” said Tina Lichens, senior vice president of broker operations at LightBox, a commercial real estate information and technology platform. “However, there are also significant areas of opportunity emerging and capital ready to chase deals where the numbers and the story make sense.”
Multifamily and industrial top investors’ wish lists
Among the top opportunities noted by survey respondents are investments in the multifamily and industrial sectors, which have consistently ranked as top asset classes by LightBox survey respondents. As the market continues to digest rapid changes in market dynamics three years after the pandemic began, multifamily and industrial have the strongest demand drivers and ability to sustain periods of uncertainty and market disruption, according to survey respondents.
“You’re going to see differences across asset classes, but multifamily and industrial are seeing strong performance and rising rents, particularly with industrial. Occupancies are also great and the income streams of these assets are strong,” said Aaron Jodka, director of reseach, U.S. Capital Markets, for Colliers, who was interviewed for the report.
Multifamily rent growth has been particularly strong in the Midwest, according to a Yardi Matrix report in May 2023 showing Indianapolis in the lead nationally with 7.0% growth year-over-year, followed by Kansas City (6.0%). Chicago (4.6%) and Nashville (2.3%) also recorded positive year-over-year growth.
These Midwest markets are expected to see slowing rent growth, to the 2.2 to 2.9% range, by year-end 2023, however, given decelerating demand in today’s economic climate. Multifamily, which has driven more than 40% of all transaction activity in the last few years, also is facing more than $1 trillion in loan maturities coming due through 2027.
The industrial sector in the Midwest mirrors many other markets around the country, with low vacancy and strong demand, despite the headwinds from higher interest rates. Given its ties to e-commerce, industrial has recorded strong leasing and investment growth in recent years and isn’t exposed to a high level of debt maturities.
Detroit’s industrial vacancy at Q2 2023 declined 20 basis points from the previous quarter, reaching 3.7%, according to Avison Young research. Detroit has benefited from recent reshoring of manufacturing, legislation like the Inflation Reduction Act and new automotive EV commitments, which are all having a positive effect on industrial market fundamentals.
Columbus shows a different picture, as vacancy increased by 120 basis points to 5.2% year-to-date at Q2 2023 as 8.8 million square feet of space, with half of it vacant, delivered to the market this year. Avison Young research also notes that sublease vacancy has increased to 2 million square feet in Columbus, compared with 588,707 square feet being available at the end of 2022.
Other survey notes:
The top concerns for survey respondents at mid-year are:
1. The potential for a recession
2. Uncertainty over shifting property valuations
3. Increased distress due to the large wave of loan maturities coming due in a high interest rate environment
4. Uncertainty over future interest rate hikes
5. Implications of recent bank failures
Brokers responding to the Sentiment Survey also noted these challenges they are observing in their local markets:
- Problems with office vacancies fueling decreased values
- Too many assets incurring deferred maintenance and vacancies
- An increase in delinquent real estate taxes (a concerning precursor to distress)
- Banks in the early stage of purging under-performing assets