Best Commercial Real Estate Markets: A Guide for Investors

Single-family housing, residential markets, and the commercial real estate market are all subjected to similar trends.

Investors constantly search for ways that these things can affect their individual markets and ask what the best real estate markets are for commercial investing.

However, trends change all the time, and the impact they create drives a person's strategy on how to beat out the competition.

We need to understand the current trends and review the things that brought us to where we are today.

Understanding the Commercial Real Estate Market

The commercial real estate market has been a wealth-building tool that's successful and reliable for investors and should continue its growth.

When the COVID-19 crisis started, professionals and experts worried about the long- and short-term effects on the real estate market in general. Clearly, the pandemic impacted economic growth on many levels. However, that didn't stop the commercial real estate markets from staying afloat.

Some commercial properties had to adapt quickly, though the statistics are improving so that businesses can resume their normal operations. Most companies had to focus on new health policies or shift to a remote working environment. Likewise, many companies continue adapting and implementing partial work-from-home options while the demand for office space has risen.

Commercial real estate agents will likely see a demand for restructuring in office spaces. Likewise, commercial landlords might have to change the buildings themselves to accommodate space and privacy, which might require building permits.

While the pandemic caused challenges for the commercial real estate industry, it's encouraging to see a quick return to these commercial spaces. The economy is recovering, and workplaces are adapting to the health practices put in place, so things should stay strong.

Real Estate Trends in 2023 and Beyond

Most experts focused on the real estate industry to see what would happen in 2023. They looked into the previous years because that can be useful for planning, but they're not fully accurate. For instance, no one would consider the COVID-19 pandemic to be the driving factor in 2020, and the effects continue to drive different trends.

Most people interested in commercial real estate investing are dealing with inventory shortages while trying to upgrade the rental properties and focusing on e-commerce. Investors should continue returning to retail spaces because brick-and-mortar stores aren't going to up and leave.

Likewise, most individuals still prefer to shop, dine, and visit commercial retail spaces. Though there could continue to be mask and vaccine mandates, most commercial areas are ready for business as usual, and that should continue into 2023 and beyond.

Professionals throughout the industry have been waiting to see how companies will continue their work-from-home policies, and that's still unclear in most areas. However, most company owners want their employees in the office, which is promising for commercial spaces.

If you're an investor interested in office spaces, you should think about the tenants you might house and what might work well for their brands.

That wasn't the only trend to focus on in 2023. A few others included the shortage of housing and the recovery of multifamily properties. Investors interested in commercial real estate should be able to keep their vacancy rates low throughout 2023. However, federal and state plans will turn to improving the infrastructure, which can increase accessibility and demand.

Overall, 2022 was an interesting year for the real estate markets. Investors focused on commercial and residential properties, which seems to be the norm going into 2023 and beyond.

How the Previous Years Are Predicting 2023

Most people thought commercial real estate markets would face interesting challenges in 2021, which focused on office space and remote work. Most of the workforce shifted to at-home jobs because of COVID-19, so investors wondered if long-term commercial leases and office buildings were still needed.

The concerns were heightened because big-name companies announced the allowance of employees to work from home permanently. Most people believed the office buildings would reopen when the vaccine got distributed and the economy returned to normal.

However, "dark stores" started popping up everywhere. This refers to retail and distribution centers that shut down operations and focus on shipping and curbside pickup. They were available before the pandemic, but they increased in demand when in-person shopping became restricted.

Warehouses offered another commercial space type in 2021. The demand for them increased significantly because retailers tried to keep up with e-commerce needs. Investors expected and were rewarded with an increase in the property value of these industrial properties. Likewise, average rent prices increased.

However, not all areas of the industry thrived because the world was still dealing with the pandemic. Investors were wary of hotels and other similar real estate options. Such industries are recovering, but it's at a slower rate, especially in dense cities.

Some real estate markets stood out in 2021 because of job growth, population increases, and the cost of living. These included:

• Denver, CO
• Portland, OR
• Raleigh-Durham, NC
• Salt Lake City, UT
• Nashville, TN
• Atlanta, GA
• Tampa Bay, FL
• Austin, TX

Did the Coronavirus Pandemic Create Change?

When 2020 started, industry experts predicted slow and sustainable growth throughout the commercial real estate markets. They indicated that changing demographic trends would impact housing, offices, and more.

The US was experiencing an expansion, so most believed that the steady and slow growth would continue. Mortgage rates were sitting at 3.75 percent based on data from Freddie Mac. That was a 1 percent difference from a year prior. In 2019, the rate drop was because of purchase and refinancing activity.

High demand caused home prices to climb upward and should have risen to 5.6 percent in the fall of 2020. More listings came on the market, which led to more competition. However, low interest rates and fewer entry-level homes caused prices to soar higher.

Overall, the housing industry remained limited because of record-high tenures and interest rates. Homeowners are staying in homes for longer, and it's impossible to buy what isn't for sale.

The trend continued through 2020, which directly affected commercial real estate. Some relief came from an increase in construction, but it was slow-going, and most people couldn't find materials.

You also have to consider who is buying. Millennials took over mortgage originations because they focus more on that instead of having children. However, the Baby Boomer generation likes to stay in place, whereas millennials shift to major cities.

Commercial real estate investment trends continued to rise because of cities housing more people.

Overall, commercial real estate prices focus on population growth and migration. In larger areas, such as Boston and Los Angeles, there will be a slower population growth rate, but commercial real estate will continue attracting capital.

How Did the Pre-pandemic Times Alter 2023

The PwC and Urban Land Institute released its report titled "Emerging Trends in Real Estate." This highlighted unpredictability in 2019. Researchers claimed that connecting the dots wouldn't work and new thinking would be required.

Overall, the report claimed that there would be overlapping trends in 2019. Researchers considered the technology utilized to improve efficiency and productivity, which would lead to the real estate industry's downsizing. Investors prepared to be surprised.

Federal officials hinted that they'd boost interest rates to stabilize the economy and help moderate inflation. There was an economic growth slowdown, which impacted all areas of real estate. As this real estate activity slowed, investors would have a hard time finding deals.

2018 saw the commercial real estate attention shift to compressing the retail industry. In fact, more emphasis went to industrial real estate because retailers are turning to e-commerce. Shipping, logistics, and warehouse spaces were still important.

Likewise, many millennials flocked to secondary and tertiary markets. Roughly 2.6 million people moved to suburban areas in 2017 and 2018. Experts felt it was because millennials wanted more affordable housing that was bigger and situated well for amenities.

Technology also played a huge role and has changed how people use the commercial space. Machine learning became readily available, making the promises of business design, organization, and management easier.

Overall, the Urban Land Institute claimed that artificial intelligence was used more for smart buildings to boost efficiency, security, and safety.

Though technology and demographic shifts were prevalent in 2019, construction costs were a huge concern for investors. There was a decline in immigrant labor, superstorms that required rebuilding, and international trade wars. Likewise, commercial investing focused on sustainability because of climate change, and that should continue through 2025 and beyond.

The Top 6 Trends Affecting Commercial Real Estate Investment

If you're thinking of beginning commercial real estate investing, you want to understand the key factors and trends that influence the market. Commercial growth will impact job growth and will likely take these things into consideration:

1. Development

This includes the urban development of public-private projects, business districts, and city centers. Each one will affect the commercial markets and tenants in some way.

2. Cost of Business

How much it costs to conduct business influences how companies move in certain markets. Cities with lower costs will attract new employment and businesses.

3. Infrastructure

Public infrastructure includes communication, public transit, transportation systems, and electrical systems. These influence how easy it is to run a business. Cities with more improvements will retain and attract tourists, businesses, and residents.

4. Housing

Housing options, rental affordability, and local prices are all factors that will contribute to a worker's migration patterns. For instance, major companies might be influenced on where to move headquarters based on the employee's cost of living.

5. Quality of Life

Walkable, urban cities with public transit, good schools, entertainment, and parks will contribute to a better quality of life for the residents. This is crucial for businesses to consider if they want to succeed.

6. Tourism

Economic growth can only happen when people are interested in visiting specific places. Therefore, the tourism industry offers various opportunities for commercial real estate, such as airports and hotels.

Where to Purchase Commercial Real Estate

Are you curious about the top commercial real estate markets to get you started? You must keep some priority items in mind. There will likely be variances, but commercial markets embodying the five criteria below will offer good returns for an investor:

• Lower Unemployment Rates - Cities with decreasing or low unemployment rates indicate better job markets. Therefore, there should be a probable demand for retail and office spaces.
• Favorable Conditions - Pay close attention to regional and local economic policies. Are there new plans to attract businesses to that area? Also, check the tax rates and use economic growth as an indicator.
• Low Purchase Prices - This sounds like a no-brainer, though it's crucial to choose a property that's priced at or below market value. You want to profit off the renters, so it might be wise to search for a distressed property; it might be sold for a good deal. Likewise, you can purchase a foreclosure property and update it.
• Low Vacancy Rates - It's wise to have a low vacancy rate coupled with a high tenant demand. That means you can charge higher rent prices and increase your profits.
• High Tenant Demand - Focus on up-and-coming markets that will create new jobs. Likewise, look into companies that develop residential complexes and see where they're working. When people are moving in, there will be a higher demand for commercial space.
• High Asking Rents - Make sure to research your options before jumping into the market. You must consider comparable ones to determine what the average asking price is for rent. If the rate is high and you have a low purchase price, you should be able to make a bigger profit.

The Top Markets for Growing Commercial Real Estate

Commercial real estate investors have four types of spaces to consider: multifamily complexes, industrial, office, and retail. If you want to invest and are on a budget, it's wise to start with the multifamily properties and industrial spaces because they usually have low price points.

Are you ready to start your commercial real estate investing adventure? Consider these markets to purchase properties now:

1. Los Angeles, CA
2. Louisville, KY
3. Charleston, SC
4. Austin, TX
5. Palm Beach, FL
6. New York City, NY
7. Miami, FL
8. San Jose, CA
9. Oakland, CA
10. San Francisco, CA

Overall, San Francisco seems to be the top-runner in 2023. It has seen a 1 percent increase in average rent prices per square foot and a 100.6 percent increase in average rent prices for office space specifically. Likewise, the average asking price in retail is about 8.6 percent higher than in previous years.

These statistics can help you determine what's right for you. However, it can help to understand what will make the market healthy. These four factors are what you should keep in mind:

• High demand for tenants with lower vacancy rates
• Low purchase prices
• High or increasing asking prices for rent
• Low or declining unemployment rates

The national market for commercial real estate looks like this:

• Comprised of retail, hotel, industrial, multifamily properties, and office space
• Asking rents that grew significantly from 2015 until now
• Asking retail rents that grow by two percent or more per year
• Property sales volume that totals in the billions
• Increasing property sales prices each year

While you want to see significant increases for sales prices and rents, even a small number can lead to a huge profit for you. This isn't always the case, and you should also consider what issues might arise or how things might change in the coming years.

For example, you may not know what the future holds, but it seems that more and more people are focusing on sustainability. Therefore, you need to be in a forward-moving city that cares about its people to ensure that you protect your assets and continue growing as the years go by.

Summary of the Trends Surrounding the Commercial Real Estate Market

It's hard to predict the future when it comes to commercial real estate. However, investors can make educated guesses. Market trends are interconnected throughout history, so you simply have to study the market outcomes in previous years, understand economic drivers that might impact the current market, and decide what to do.

Performing your own research into the economic growth of a particular area of interest will help you decide. When you're ready to tackle commercial real estate investments, make sure you have ironclad leases. You can find everything you need with the property management system DoorLoop offers!