Mihkel Grunbaum of Monmouth Beach is a real estate industry professional. In the following article, Mihkel Grunbaum discusses if opportunities in commercial real estate can be found amid rising inflation.
The commercial real estate (CRE) market’s health and opportunity tend to follow wider sectors. However, early indicators display that it may not be that simple over the next 12 months. While investors are determined to find victory, they remain cautious as interest rate hikes and seemingly ongoing inflation run rampant.
Mihkel Grunbaum of Monmouth Beach says that previous years’ unprecedented transactional volume shows that there will likely be continued opportunities in competitive classes like industrial and multifamily complexes, despite the otherwise challenging economic climates.
CRE Market Overview: Sky-High Interest Rates, Ever-Climbing Inflation, and Plentiful Opportunities
One of the most appealing things about the commercial real estate market heading into 2023 is the bounty of opportunities for risk-tolerant investors — provided they are willing to seek them.
As per CBRE’s report, the market reached an all-new transaction volume high of $1.3 trillion in 2021, causing a pretty tricky environment to follow. However, Mihkel Grunbaum says that it proved that there’s always an opportunity to garner high returns in certain asset classes. And experts suggest this will continue in 2023, especially for tech-enabled firms ready to unearth the best chances.
Naturally, inflation has played a massive role in rent increases, causing multifamily class A and B properties to increase rents by 10% year-over-year. Consequently, class C building owners have found receiving rent from their tenants challenging.
Mihkel Grunbaum reports that industry experts say smaller investors could face barriers to entry, whether they have the capital to deploy or not. Plus, owners holding older assets may hit hardships when monetizing them as new-and-improved energy regulations flood the market.
For 2023 (and, likely, beyond), technology will be the leading tool for investors, steering them away from risk profiles and toward high-return deals. Firms that plan to utilize the best that tech has to offer while honing their manual investing skills are set to beat others to market, reshaping some companies’ CRE outlook this year.
Investors Can Use Commercial Real Estate as a Hedge
Mihkel Grunbaum says that capital markets face high inflation with daunting feelings. However, real estate investors can enjoy a degree of peace regarding portfolio stability. After all, inflation increases the worth of owned assets, creating a hedge and safeguarding investors from the harmful effects likely experienced by other markets.
During periods of high inflation, even overseas investors turn to U.S. real estate markets for portfolio safety. Most investors have increased rents according to inflation, guaranteeing short-term returns.
As for new deals in this climate, cost will be a primary consideration. So, Mihkel Grunbaum says that investors looking to complete new transactions should pay acute attention to detail to ensure that the high costs work in tandem with their strategies.
Re-trades to Become the Norm in 2023
Following 2021’s ideal market conditions, investors planned to tackle 2022 in the same manner. But it became very clear very quickly that this wasn’t meant to be.
As it happened, last year saw investors re-trade deals in progress. Transactions that seemed profitable in early 2022 didn’t hold the same interest rates or terms as the year progressed, forcing companies to reconsider returns.
To increase the likelihood of success, Mihkel Grunbaum of Monmouth Beach explains that firms should have solid strategies and processes to compare models that constantly consider differing conditions. That said, ensuring efficiencies in closing deals could be the key to eliminating the necessity for late-stage adjustments.
Retail Investors to Prioritize Repositioning and Value-Add
E-commerce has sliced in-store consumer buying habits, especially amid and following the COVID-19 lockdowns. Even though this has reduced opportunities for traditional retail investments, firms are beginning to navigate the landscape with an all-new perspective.
It appears that value-add investments could stay a focus of such investors, especially while suburban communities expand.
Elsewhere, repositioning retail assets for other uses could increase profitability and stabilize portfolios. Buildings once utilized for retail tenants are slowly being refitted for brand-new purposes, including medical offices, life sciences, and more.
Mihkel Grunbaum says that the office market saw a prompt downturn as the world shifted to a work-from-home model. However, it’s noticed a slight recovery as many employees return to the workplace. As per NAR’s April 2022 report, rent prices are up across every market, bar Washington D.C.
2023 Sees Growing CRE Opportunities
Even with the new challenges, opportunities are only expanding for investors willing to get involved in the volatile market. Despite ever-changing investment strategies and asset values, the commercial real estate market will continue transacting, with strategic players coming out on top.