Due to the rising demand for office spaces, low availability of space, and escalated rental prices of office space and warehouses, Indian commercial real estate is expected to become a lucrative avenue for global institutional investors. The trends dictate that amidst rampant inflation, ongoing global economic volatility, interest rate spikes, and work-from-home, investors will stay conscious but will be determined to succeed.
The real sector forms one of the crucial foundations of our country’s economy. The sector suffered a major blow during the covid-induced pandemic which lowered the consistency of the high-net-worth investments frenzy. Nonetheless, the reopening of properties has now increased the interest of investors in real estate.
Commercial real estate makes a major component of the real estate sector and contributes to its exponential growth. During the pandemic, the CRE sector also suffered a hiccup and is now on its way to advanced growth.
This brings us to wonder what is in store for this sector in 2023.
Let’s explore this conundrum further and find out a few trends that we can look forward to in commercial real estate in 2023.
1. Amidst the inflation, Commercial Real Estate is appearing as investors’ favorite avenue. Let’s find out why –
When it comes to portfolio stability, real estate investors often experience peace of mind even in inflation as other capital markets suffer the wrath of inflation. The reason, inflation increases the value of owned assets for real estate investors. This protects their portfolio from the unfavorable impacts of inflation. Some global investors even consider United States real estate as a safe investment market in present times.
Many commercial real estate investors have started increasing property rent in accordance with inflation to gain short-term returns. Real estate can only act as a hedge against inflation when the rent increment outweighs the spike in property maintenance cost. In this inflationary environment, the cost of commercial real estate capital will be high. As a result to which, investors will have to be careful with the new deals, gain clear visibility of future returns, and ensure that high costs is aligning with their long-term strategies.
2. 2023 will bring more opportunities to well-funded institutional players. Here is why –
The 20-year-old trend of institutionalization in commercial real estate will continue as long as the market is substantially fragmented. In this trend, distinguished investment managers with more funding outperform smaller firms and wealthy people. In present times, when the CRE sector is facing high-interest rates and potential recessionary threats, the size might prove more advantageous than ever. The opportunity to benefit from economies of scale is only expanding, which creates a brighter outlook for large commercial real estate institutions in 2023.
Larger institutions may also get access to greater capital pools at a cheaper rate. They can also enjoy the flexibility of all-cash deals and can invest in stormier times than their smaller counterparts. This way large institutions avoid paying high-interest rates. On the other hand, smaller institutions rely on loans to pay exorbitant interest rates and often have to take a break to wait for the circumstances to get better. All this while large institutions enjoy freedom & flexibility to pace towards long-term investment avenues.
3. Hybrid workspaces will be the new normal –
The office spaces and vast warehouses are the components that are paving the way for the commercial real estate sector toward gradual expansion. According to Statista, the warehouse sector of the country is expected to raise the investment of Rs. 81,000 Crores by 2025 to assist the expansions of the entire real estate market. The leasing activity across the industries has picked up speed and it won’t be wrong to say that the market currently is undeniably sparkling. Many offices have resumed work from the office and many more are to follow the trend.
After the pandemic, the popularity and demand for hybrid workspace have risen. Owing to the demand for worker flexibility and re-optimization of portfolios, owners of flexible workspaces are looking forward to expanding & diversifying their portfolios in the next 2-3 years. Here are some factors that will drive the adapt-to-suit workplace industry in 2023 –
- Rise of the demand for hub-and-spoke model workspaces
- An increasing number of strategic partners
- Demand-driven acquisitions
- Focus on health, safety, and technology
Though there are new challenges, the opportunities are expected to grow only for investors who are willing to dive into the volatile tides of the commercial real estate market. The investment strategies and the value of the assets may change due to several variables, the CRE market will continue to operate and benefit the most strategic players.
So the floor of the commercial real estate market may look slippery right now but capitalizing on growth opportunities in 2023 with the right strategy will turn the tide in your favor.