Retail Real Estate: Where Is It Going in 2023?

The economy has undergone substantial changes over the past few years, which can make it challenging to determine how the commercial real estate market will react in 2023. Different sectors of commercial real estate have different outlooks. For the year ahead, supply chain issues may still pose a problem. Inflation will also remain high for the foreseeable future, which may cause some investors to be wary about investing in commercial real estate. However, there are several bright spots for retail real estate that make it a good sector to invest in.

How Current Economic Conditions Could Impact Retail Real Estate

The U.S. economy is currently in flux because of market volatility and geopolitical issues. When you combine these factors with high interest rates and inflation, caution should be exercised before making any commercial real estate investment.

Increasing Interest Rates

At the moment, the federal funds rate is currently situated between 4.50%-4.75%. While the Federal Reserve has indicated that only small increases will occur throughout 2023, interest rates are still higher than they’ve been since the financial crisis in 2008. The main benefit of high interest rates for retail real estate investors is that tenants might continue upping their leases for a lengthier period of time.

Geopolitical Problems

Sanctions on Russia and the ongoing war in Ukraine have had significant economic implications throughout the world. While the effects are less severe in the U.S. when compared to European countries, the continued supply chain issues have caused energy, food, and shelter prices to increase.

High Inflation

The annual inflation rate is currently 6.5%, which is lower than the high of 9.1% in June 2022. While inflation has eased somewhat in recent months, it remains high, which is one of the reasons why retail buildings are more expensive for potential buyers and tenants. All of these factors could cause a mild or moderate recession this year, which is why forecasting what will happen in the retail real estate market is less than precise.

How Retail Real Estate Should Perform in 2023

The state of the retail real estate market in 2023 depends on the retail category and location. Neighborhood shopping centers have performed well over the past few years. However, shopping malls haven’t had strong performances in more than a decade. One improvement that many investors are considering is redeveloping shopping malls for sales tax purposes.

These buildings are being converted into different types of mixed-use properties, which include apartment/restaurant and retail/movie theater combinations. In city centers, retail hasn’t been revitalized as quickly as it has in other areas. Urban retail usually comes with higher rents that can be difficult for businesses to pay. There are also less people working in downtown offices, which adversely affects nearby retail spaces.

Since 2023 will likely have slower GDP growth, companies won’t take as many risks. In the uncertain economy, lenders are less likely to provide borrowers with credit, which results in less lending activity. Asset pricing will also be volatile for months to come.

With the right approach, you can take advantage of the varying market conditions to make good investment decisions. Most types of real estate will perform well in 2023. Note that some building owners will be over-leveraged because of the economic downturn, which gives you an opportunity to bolster your portfolio at a lower cost.

While the retail real estate market hasn’t performed extremely well over the past decade, there are several indicators that the market is currently healthy. For instance, retail vacancy across the U.S. dropped to around 6.1% during the second quarter in 2022, which is the lowest vacancy rate in more than 15 years and a good sign of a strong market.

The reason for this decrease is due to a higher number of stores being opened rather than being closed, which is the first time this has occurred since 1995. Brick-and-mortar companies are currently primed for success. The only commercial real estate sector that’s currently performing worse than usual is the office sector. In comparison, the forecast for the retail real estate market is positive for both the short and long run.

If you’ve been searching for the right investments to add to your portfolio, retail real estate is particularly strong at the moment. Before adding any investments, make sure that you perform extensive research that gives you a better understanding of the investment’s growth potential.