Dallas, Texas skyline

Much of what could be said in the first quarter of 2023 still applies in the second quarter, with languid transaction activity and uncertainty being the primary hallmarks. Commercial real estate was generally sideways this quarter as activity remained depressed and confidence in fundamentals seemed down. While there are no guarantees, we are optimistic that absent any significant shocks to the system, the U.S. economy and commercial real estate are in line for a relatively soft landing, with a likely upsurge in activity later this year.

Key takeaways:

  • Multifamily housing: Multifamily real estate is under pressure with the confluence of increasing expenses, higher capitalization rates and minimal rent growth impacting financial performance and driving down valuations. Operational efficiency regarding collections and controllable expenses will be more essential than ever while rent growth remains constrained.
  • Office: Low levels of demand for physical space continue to plague the office sector, as office vacancies set a new record. Several factors coupled with already high and increasing interest rates have also increased yield expectations, further hindering a recovery in the office sector.
  • Retail: Retail has weathered the storm of the pandemic and come out the other side stronger. As consumers continue to exhibit a strong desire for convenience and in-person experiences, we believe brick-and-mortar retail investors and owners are well positioned for success when the capital markets environment loosens.
  • Industrial: Industrial real estate remains among the strongest commercial real estate sectors as investors and owners continue to capitalize on low vacancies and high rent growth in 2023. These trends showed signs of cooling in the second quarter as new supply caught up to demand while consistent interest rate increases by the Fed have made transaction financing more challenging.
  • Capital markets: The second quarter was generally more of the same with depressed activity levels amid a generally tepid economic environment. Numerous factors are mildly encouraging including moderating inflation, continued strong employment figures and resilience in the financial sector.

For further analysis of the second quarter, download our latest report.

For more information on this topic, or to learn how Baker Tilly specialists can help with your real estate needs, contact our team.

Brent W. Maier
Kevin R. Secrist
The actuary and IFRS 17
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