Cautiously Optimistic: Urban Land Institute’s CRE Predictions for 2023

It’s that time of year again, and Urban Land Institute (ULI) and PwC have released their 2023 “Emerging Trends in Real Estate” report for commercial real estate (CRE) professionals to pore over. The report, which covers the US and Canada, lays out predictions for the coming year, based on the opinions of a broad range of professionals in the industry.

As many of us have been expecting, the combination of rising interest rates, a possible recession, and tapering investment returns means that we are sailing into tricky waters in 2023.

The good news is that despite these challenges, ULI reports that most CRE professionals remain “reasonably upbeat about longer-term prospects.” They add that survey respondents are cautiously optimistic that we will be able to “ride out any near-term slump” before a new round of growth and strong returns.

With that in mind, let’s have a look at some of the trends CRE professionals will need to navigate in 2023.

Overarching trends

The first prediction in this year’s report is that we should expect to see the market “normalize” in the coming year. Specifically, while property sectors like industrial cool off, there may be a counterbalance in hospitality and retail as they return to historic averages.

Meanwhile, the trend in the office market seems to be headed for its own “new normal”, but what that looks like remains uncertain. As one respondent quoted in the report put it: “I don’t think we’ll know the outcome of office until we’re through a recession and the power dynamics between employee and employer change. But we do know there’s definitely going to be less office demand.”

And while ULI cautions the actual level of decline is a guess at this point, most experts are predicting somewhere between 10-20% of office stock “needs to be removed or repurposed.”

Cooling capital

On the capital markets, front things are also likely to slow down, as the heightened CRE investor interest that we saw in 2021 to mid-2022 tapers away. The report notes that there are fewer investors on board for 2023 as lower returns, higher costs and debt, and general market uncertainty trigger a “reset” for real estate investing.

Worth noting is that the demand is still likely to be highest for investment properties in the industrial and multifamily sectors, along with “best quality” assets in retail and office. This certainly seems to hold up in terms of the “flight to quality” we’ve seen this year as companies pull out all the stops to get workers on-board with coming back into office.

In addition, niche property types, like medical office buildings and cold storage, remain a potential wildcard as more investors look to diversify their property portfolios.

Outlook up North

Caution from investors is also a key theme in Canada, as CRE companies find it increasingly difficult to access funding for new projects and developments. As the report points out: “… for now, the heightened uncertainty is leading many players to stay on the sidelines as they wait to see where the market, particularly when it comes to pricing and valuations, settles.”

At the same time, the growing drive to meet Environmental, Social and Governance (ESG) imperatives means that companies with a strong ESG focus are likely to have an easier time accessing Canadian capital.

Top US markets

The normalization trend seen for real estate sectors seems likely to play out across different markets as well. PwC reports that markets that previously outperformed are seeing a drop off, while some low-rated markets improve their standing.

Despite a modest retraction, however, the real stars of the show as we head into 2023 still seem to be concentrated in the Sun Belt. Metros like Nashville and Phoenix, which have gone from strength to strength over the last couple of years, are still viewed as top prospects by CRE professionals and investors alike.

A challenging year

As these predictions show, the environment CRE professionals face in 2023 is likely to be at least as challenging as what we’ve seen in recent years. We’ve already seen the start of price dips as markets begin to react to rising interest rates, and there are assuredly more challenges incoming.

What those challenges look like will of course vary between sectors and regions, and no single strategy is likely to be equally effective across the board. What remains true however, is that for the savvy CRE professional careful positioning, and a focus on fundamentals, will be integral to navigating the year to come.