Source: Forbes —
Despite economic uncertainty and growing interest rates, the U.S. commercial real estate market experienced successes in 2022. As one example, Atlanta saw $30.7 billion in direct commercial real estate investments between the fourth quarter of 2021 and the third quarter of 2022. That’s as much as Beijing, Tokyo and Singapore combined, according to data from JLL.
However, a lot has changed in the past few months. I’ve observed that as a result of higher borrowing costs and wide bid-ask spreads, a lot of commercial real estate investment activity seems to have ground to a halt. This is leaving many institutional investors, who have raised money over the past few years, on the sidelines. But the fundamentals around the strongest-performing asset classes haven’t changed (e.g., the housing shortage still persists, which provides a strong tailwind for residential), so I believe institutions are simply waiting for the right moment to jump back in.
If the interest rate increases slow down, I expect to see investors return to the market in 2023. As the co-founder and CEO of a small-scale commercial real estate investment company, the area I’m paying attention to is the sub-$50 million small CRE space, where I’ve found there is relatively weaker competition due to fragmentation and less liquidity.
Within small-scale commercial real estate, which verticals might win and lose in 2023?
Small-scale commercial real estate encompasses many different verticals, and each will perform differently depending on market conditions and the macroeconomy. It’s important to understand each, as this can inform how investors build their portfolios.
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