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6 Commercial real estate indicators to watch in 2023

The white-hot real estate market here in Texas and throughout the country has been a prime reason for the Federal Reserve to raise its interest rates four times in 2022, going to the highest rate since 2008. This change caused a modest and slow decline in prices in recent weeks.

There will likely be more interest increases in 2023 to combat inflation. Other commercial real estate issues to weigh upon the market in the coming months include:

1. Inflation still up

Inflation goes into the new year at historically high levels, which will impact construction costs, debt, overhead, rent, vacancy and other issues related to ownership. Commercial real estate professionals will need to adjust and mitigate the risk of rising costs.

2. Property values in flux

Property values or appraisals are starting to decline at the end of 2022. Higher borrowing costs impact the CAP rates. Strong job growth in individual markets may support higher prices in them.

3. Office space trends down

According to the National Association of Realtors, office space is the most vulnerable to decreases. This trend is less about interest rates and more about the glut of office space as companies embrace hybrid or work-from-home formats even as the pandemic recedes.

4. Multifamily properties continue to trend up

Multifamily properties will continue the growth over the last five years. Investors like to hedge their bets against inflation by going with this steadily increasing marketplace sector. Historically low housing stock across the country also plays into this thinking.

5. Elections could signal changes

The midterm elections signal changes locally and nationally, and markets tend to wait until after the elected officials take office in 2023. This year did not fulfill predictions of wholesale change, but there could be shifts in power locally, state-wide or nationally that will spur new activity or shut existing plans down.

6. Recession fears may continue

Unless a significant market shift exists, recession and inflation fears will continue in 2023. Moreover, some argue that two negative quarters of GDP growth in 2022 mean we are already in recession. Regardless of how real estate investors and professionals want to define it, inflation and recession impact everything, ranging from vacancies to rent collection to weakened values. If the economy improves in the coming days, these fears will subside to a more modest level.

Knowledgeable guidance can offer a clear path forward

Real estate investors, owners, developers, and professionals have a lot to consider as they follow through on existing projects or launch new ones. With the many variables in the marketplace, it is more crucial than ever to work with an attorney who understands the economics of commercial real estate and related legal issues. They can provide offer useful insight and strategies for navigating the shifting marketplace in 2023.

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