Economic uncertainty is weighing on commercial real estate investors for the coming year, with more than 60% reporting that they expect to decrease purchasing activity in 2023 compared with 2022 levels, according to CBRE’s 2023 Investor Intentions Survey. In addition, almost half of the respondents indicated that they expect to decrease purchasing by more than 10%.
Investors also will be reluctant to sell in 2023 as market pricing falls, with 60% of survey respondents saying they will either sell less or not at all, while 27% reported that they expect to sell the same amount as in 2022.
The survey, which covers all asset types, finds that investors in the U.S. will favor opportunistic strategies as well as have a preference for secondary markets as the nation faces higher interest rates and tighter financial market conditions.
Nearly one-third, 29%, of investors reported that they will target opportunistic and distressed assets this year compared with 19% in 2022. The Sun Belt and high-performing secondary markets also will remain hot for investments. Dallas leads the list of target markets, followed by Austin, Texas; Miami; Los Angeles; and Nashville, Tennessee. Atlanta; Charlotte, North Carolina; Phoenix; Boston; and Raleigh-Durham, North Carolina, round out the top 10.
Out of the asset types, multifamily, particularly traditional apartment complexes, remains the most sought-after sector at 38%, followed by industrial, 28%, led by modern logistics facilities in major markets.
“While weakening macroeconomic conditions and rising interest rates will weigh on commercial real estate investment volumes in 2023, the amount of capital targeting the sector remains abundant,” said Chris Ludeman, global president of capital markets for CBRE. “Investors are willing to accept more risk and achieve higher returns and other metrics such as lower leverage, increased debt-service-coverage ratio, and once again a focus on acquiring assets at a discount to replacement cost have all been pushed to the forefront.”
CBRE is forecasting that year-over-year investment volume will be down by 15% in 2023. However, Ludeman said he expects “investment activity to pick up in the second half of the year as market conditions stabilize.”
While adoption of environmental, social, and governance (ESG) standards are likely to continue, nearly half of the respondents said the worsening economic outlook will limit the extent of how they look at ESG criteria in their investment decisions. However, more than 80% of respondents said they do not think the economic uncertainty will impact their adoption of ESG altogether.
According to CBRE, real estate debt is considered the most attractive alternative investment, followed by build-to-rent, life sciences, self-storage, affordable housing, data centers, and student housing.
“Despite continued conservative underwriting, most lenders are currently quoting and winning new business, even though they expect new originations to decline 10% versus the prior year,” said Rachel Vinson, president of debt and structured finance in the U.S. for CBRE. “Concerns around maturity risk and more conservative underwriting criteria from traditional lending sources—focused on wider going-in and exit cap rates, higher debt yields—will contribute to the further rise of opportunistic investors. While uncertainty continues, the need for capital, whether for tenant buildouts, basic improvements, or ESG upgrades, is certain. The question remains how long can both lenders and borrowers wait.”