CBRE’s US Real Estate Market Outlook for 2023: Optimistic Yet Uncertain Across Sectors

CBRE, US Real Estate Market Outlook Event 2023, United States, Europe, China
Courtesy of CBRE

By Kate Snyder

Despite the looming prospect of a moderate recession, experts were optimistic about the real estate market outlook for 2023 during a recent panel discussion from CBRE. Julie Whelan, global leader of occupier research at CBRE, who moderated the discussion, opened the event by saying change, progress and opportunity are three themes that offer “cautious optimism against a backdrop of uncertainty.”

The U.S. Real Estate Market Outlook Event 2023 took place on Jan. 11, and participating experts echoed Whelan’s opening remarks with details regarding the economic outlook, expectations, shifting consumer behaviors and the anticipated trends of 2023 across a variety of real estate markets.

Richard Barkham, global chief economist for CBRE, laid out details about the challenges facing the economy, both domestically and internationally. Both the U.S. and Europe are contending with inflation as well as rising interest rates, and China’s economy, he believes, will reverse its downturn. That projected upward swing from China would be good news for the global economy, Barkham said, but could make the fight against inflation more difficult.

“Along with many other forecasts, we see the United States entering a moderate recession in 2023,” Barkham said. “Probably after Q1. Domestically, despite some recent good news, the battle with inflation is not yet done. There is still excess demand in the labor market…. I think there will be one or two more interest rate rises to take demand out of the economy and reduce the pressure on inflation.”

Darin Mellott, head of capital markets research at CBRE, said over the short-term, rising interest rates can negatively affect property values – those in the industry have seen roughly a 10 to 15 percent hit to values across most property types, and he estimated that there could be an additional five to seven percent decrease. Despite the projected short-term headwinds, though, he expects to see a basis for recovery within the second half of the year.

“I think you’ll see some distress, but not broad based,” he said. “We’ve started hearing rumblings, but much of that has been concentrated in portions of the office sector Class B and C assets. Fundamentals across most property types are quite strong heading into what we expect to be a moderate recession.”

In retail, new development has slowed for the past several years, and Brandon Isner, head of retail research at CBRE, doesn’t see that changing anytime soon. With retail availability down to its lowest point since at least 2005 and soaring buildout costs, retailers are holding on to stores, sending store closures in 2022 to a 48 percent decrease over the previous year.

“In the last three years, we’ve set new record lows each year for new development in retail,” Isner said. “And 2023 could very likely be the fourth.”

From the industrial side, a minor recession wouldn’t likely affect the plans made by larger retailers and suppliers to continue making real estate decisions based on strategies for services and consumers for the next five to 10 years, said James Breeze, head of industrial research at CBRE. As a result, overall industrial demand is projected to remain solid.

“Having those warehouses in the right locations are key to companies’ survival,” Breeze said. “Protecting inventory remains key.”

For the hotel industry, 2022 was the strongest and fastest recovery ever seen, said Rachael Rothman, head of hotel research at CBRE. Fundamentals were well above 2019 levels even without the recovery in demand. Heading into 2023, Rothman said researchers are optimistic about performance with projected rebounds in group travel and easing of international travel restrictions.

In the multifamily sector, demand has lagged, which allowed supply to come in and push up vacancy rates, said Matt Vance, head of multifamily research at CBRE, and he expects that supply and demand imbalance will continue throughout this year.

“Demand really has its work cut out for it,” he said. “Not only do we have the economic turbulence, but there’s also a record number of multifamily units under construction in the U.S.”

On the office side, structural changes to the sector will continue to impact demand this year, said Jessica Morin, head of office research. The physical occupancy of office buildings hasn’t moved much since Labor Day, and nothing currently is pointing to any major upcoming shift in that. More white-collar layoffs could potentially give employers leverage to mandate more days in the office as opposed to remote, but the tech center – the largest adopter of remote work – has already seen large layoffs and also reduction of office space.

“As we enter this recession, companies are going to look to cut costs, and they’re going to look to prevent unnecessary spending,” Morin said. “So real estate leaders are going to use office utilization data to eliminate unused office space. Both these forces are impacting space decisions, and recently downsizing and relocation have been among the top inquiries.”