“CBRE expects that the slowdown in investment and lending activity in the first half of the year will lower total investment volume in 2023 by approximately 15% from 2022,” the authors wrote. “However, as Federal Reserve policy and economic conditions become more predictable around midyear, we expect investment and lending activity to recover.”
When will inflation come down in 2023?
The key considerations for buying and lending expectations this year are when inflation will peak and where interest rates will end up, according to the survey. About 50% of investors believe inflation will peak in Q1 or Q2, while 35% believe it has already peaked. Along with high inflation, most investors expect higher borrowing costs. More than 70% of surveyed investors believe the 10-year Treasury rate will exceed 3.75% at year-end 2023.
Lenders shared a similar outlook on inflation, with 48% of those surveyed believing it will peak in Q1 or Q2 and 33% believing it has already peaked. Lenders also expect higher borrowing costs, but to a lesser degree than many investors. More than 50% of surveyed lenders believe the 10-year Treasury rate will exceed 3.75% by year-end, while 43% believe it will finish the year between 3.00% and 3.75%.
Both investors and lenders highlighted rising interest rates as a key challenge for commercial real estate activity in 2023. Uncertainty about the direction of interest rates will limit real estate investment activity, particularly in the first half of the year. Nevertheless, CBRE believes that inflation and borrowing costs will not be as high as many investors and lenders expect. We forecast that the 10-year Treasury rate and inflation (CPI) will end the year at 3.2% and 4.0%, respectively.
What is the most profitable sector of real estate?
- Multifamily remained the most sought-after property sector by investors and the second most by lenders, according to the survey. Apartments were the most popular multifamily subsector despite weakening fundamentals over recent quarters, the research found. Half of surveyed investors indicated they expect price discounts of between 10% and 30% for multifamily assets this year, while 34% said they expect discounts of less than 10%. Build-to-rent and affordable housing were selected as desirable alternatives in the sector.
- Industrial & logistics was the most favored sector by lenders and the second most by investors. Modern logistics facilities in major markets were the preferred industrial subsector by investors. With continued strong industrial real estate fundamentals, the sector had the highest percentage of investors (14%) indicating that they would not expect price discounts. Investors named self-storage and data centers as their preferred alternatives in the sector.
- Investors and lenders appeared pessimistic about the office sector. Only 10% of investors and no lenders selected ‘office’ as a preferred property type. Less office usage since the COVID pandemic has caused higher vacancy rates and weakened the sector’s real estate fundamentals. More than half of investor respondents are expecting price discounts of 30% or more for Class A value-add office assets, while 25% are expecting discounts of more than 30% for stabilized Class A assets. While this is a difficult period for the office market, high-end Class A office assets are still performing relatively well.
- The retail sector was most preferred by only 9% of surveyed investors and 16% of lenders. Grocery-anchored centers remained the most preferred retail subsector, while 78% said they would expect price discounts for shopping malls.
Where is the best place to invest in 2023?
Both investors and lenders indicated a strong preference for fast-growing secondary markets, particularly in the Sun Belt, including Austin, Texas; Atlanta; Miami; Nashville, Tenn.; Charlotte, N.C.; San Diego, Calif.; and Raleigh, N.C. Many investors expect these markets to outperform in 2023. Other preferred markets included Los Angeles and Dallas/Fort Worth.