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Commercial Real Estate Outlook

As we get into the second half of 2023, there are some important trends in both commercial real estate and construction to keep an eye on for the remainder of the year. These markets have seen varying performance as of late, especially considering the state of the job market, changes in commercial lending, inflation, and recessionary activity. Our commercial real estate outlook can help you stay ahead.

The Remainder of 2023 Forecasted

The real estate market is projected to see varying levels of growth across different sectors and different areas across the country. So far this year, the apartment sector has seen positive net absorption, meaning there has been a relative decrease in the supply of this commercial space being available to the market. However, the Chief Economist for the National Association of Realtors expects the apartment sector to record a modest uptick in vacancy with more availability.

For nonresidential markets, the NAR Chief Economist stated that retail sectors added 361 million square feet and 64 million square feet over the past year (as of May 2023). On the flip side, continually changing work environments like hybrid and remote work have led the office market to see a reduction in net absorption by 29 million square feet. It is projected that the office market will continue to see rises in vacancy rates.

The decisions of the Federal Reserve to aggressively increase interest rates has also caused imbalance for regional and local banks, which impacts their ability to provide commercial real estate loans and tightens lending policies.

Construction Trends

Coming out of 2022, materials prices in the construction space saw considerable inflation of 16% than the year prior. So far in 2023, aggregate net construction input volatility remains 50% higher than that of pre-pandemic volatility, but many materials have returned to their pre-pandemic volatility.

According to Jones Lang LaSalle (JLL), volatility product categories are likely to look as follows:

Low Price Volatility

  • Flat glass
  • Aluminum mill shapes
  • Insulation
  • Lumber and plywood

Medium Price Volatility

  • Plastics
  • Concrete
  • Steel mill products

High Price Volatility

  • Gypsum products
  • Copper and brass mill shapes
  • #2 diesel fuel

With this in mind, we’re likely to see prices increase in concrete, plumbing, electrical, masonry, and HVAC; stabilization in metals, openings, finishes, and furnishings; and declining pricing in wood/plastics/composites, thermal, energy, and transportation.

The value of nonresidential construction is expected to expand as we continue through the year by roughly 6%, with the industrial sector at the helm. In 2022, manufacturing and commercial sectors were up 56% and 38% from pre-pandemic levels.

According to Associated Builders and Contractors, 2023 should continue to show down markets in residential, office, warehouse, and retail construction. The up markets are expected to include public works, power and utilities, and data center construction. It is always prudent to keep a close eye on shifting commercial real estate and construction markets, and as we round out the year, be on the lookout for projections for 2024!

Learn more about our commercial real estate and construction solutions by visiting our website or calling Republic Bank of Chicago at 800-526-9127.

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