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Opinion: There are still investment opportunities in commercial real estate

Commercial real estate is regarded as one of the most reliable performers providing stability, consistency and a profitable market. However, the pandemic has brought on a slew of challenges resulting in volatility in the commercial real estate market. From rising interest rates and rapid changes in technology to supply chain disruptions, firms had to respond quickly to a fast-moving real estate industry by optimizing internal processes and introducing property technology. However, in a metamorphosis commercial market — full of new opportunities and challenges — is making a comeback.

Retail continues to change

The retail sector has seen the most changes due to the pandemic and before. However, this sector has proven to adapt to changing consumer behavior and is recovering quickly.

Customers no longer want to go inside to browse; they prefer to shop with businesses that give the option of on-site or curbside pickup. This means retail spaces must feature extra inventory organizational areas and have the capacity for pickup transactions. In addition, increases in e-commerce have pushed developers to repurpose retail malls that were side- lined.

Much like retail, malls are also seeing a reduction in customers. Investors are currently transacting not to hold but for repurposing.

Multifamily demand rising

There is rising demand for multifamily commercial real estate, such as apartment complexes. Multifamily investors are seeing a substantial rise in demand in response to increases in rent. According to data from CoreLogic, Miami has seen the fastest rising rents of any U.S. city over the past year. Redfin reported that rents in New York and South Florida metros also surged more than 30%. Average monthly rents rose by 13% since last year.

This is partly due to young renters who moved to the suburbs during the pandemic and are now back in the city centers seeking new rentals. Depending on the market, rent is projected to grow up to 10% in 2022.

While urban multifamily popularity declined early in the pandemic, it’s now experiencing a resurgence. As a result, companies are gradually returning to the office, driving some workers right back to central business districts. The Global Commercial Real Estate Services (CBRE) offered a 2022 U.S. real estate market outlook report for multifamily and projected growth in investment of $234 billion for the year.

Industrial sector remains popular

Again, e-commerce has increased the popularity of industrial warehouses and distribution centers. That need continues to escalate. Ecommerce has become a significant driver for the increase in demand for warehouse space and that demand is driving up prices and a record low in vacancies.

In addition, niche properties, such as cold storage and data centers, have grown in popularity with investors.

High Industrial demand is also a result of the most significant contributor third-party logistics providers and leasing among e-commerce. However, retailers are increasingly in the mix, trying to save money and gain more control over their supply chains by purchasing warehouses.

Office sector

Unfortunately, the once-anticipated mass return to office never materialized in the fall of 2021 as the new COVID-19 variants posed challenges to plans. Companies must now choose between the hybrid or office model. As a result, commercial real estate leases have become shorter.

“Trophy offices” are now in demand as businesses attempt to entice employees with amenity-rich, modern, attractive buildings.

Hospitality on the rebound

There is a boom in business and leisure travel. With this increase, luxury hotels have undertaken significant renovation projects. As a result, projects on the drawing boards are now moving ahead in the construction process. We expect to see a bounce back from city centers and interest from hotel brands in incorporating mixed-use components into their projects.

Mixed-use zoning on the rise

Mixed-use zoning is quickly becoming one of the most significant asset classes in 2022. This means a boom in parking, distribution centers and self-storage. The repurposing and repositioning of these existing assets will add immense value to investments for the next several years.

Investor sales transactions

The pandemic upturned the commercial real estate industry and interrupted most retail demand and leasing activities. However, the industry has managed to survive, which helped to strengthen investor confidence leading to a 17% increase in industry transactions in 2021.

While commercial real estate sales transactions were down, hotels were experiencing increased transaction volume. However, entertainment and tourism were still below target; this indicates that investors purchased hotels intending to convert them into a different asset class such as multifamily or industrial.

Investors making faster decisions

The proptech revolution has led to a shift in how investors require deal and data visibility to make faster accurate decisions. Investors now have access to standardized data, which allows them to extract information on strategic insights more quickly as opposed to the traditional methods

This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.

To contact the author of this story:
Joe Berko at jb@astorrealtycapital.com

To contact the editor responsible for this story:
Tracey Velt at tvelt@realtrends.com

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