With mere weeks left in 2022, it’s time to consider what the new year has in store for commercial real estate. The future is uncertain, especially with a potential recession on the horizon. Nonetheless, the real estate professionals interviewed for PwC’s Emerging Trends in Real Estate in 2023 were cautiously optimistic despite dealing with “cyclical headwinds.”

As we reflect on the previous year and plan for the upcoming one, here are a few notable trends to watch in the commercial real estate world, according to the PwC report and other expert sources.

1. Commercial real estate prices might decline slightly in 2023.

National Association of Realtors Chief Economist Lawrence Yun has predicted a potential price dip due to higher interest and borrowing rates, which have, in turn, boosted cap rates and lowered property values. Office buildings will likely experience the most significant impact as remote work dampens demand.

2. A potential recession could impact commercial real estate along with the rest of the U.S. economy.

Geopolitical issues, climbing interest rates, and record-breaking inflation have positioned the U.S. in “uncharted territory” economically, according to the 2023 commercial real estate outlook from Al Brooks, head of JP Morgan Chase Commercial Real Estate. Brooks predicts that all of those influences could culminate in a “mild to moderate” recession in the new year that could affect all asset classes.

3. Remote work continues to drive up office space vacancy rates, although a mass exodus is unlikely.

Nearly three years after the pandemic precipitated a spike in work-from-home arrangements, many employees who used to occupy offices haven’t returned to full-time on-site labor, according to PwC’s Emerging Trends report. Subsequently, real estate industry insiders estimate that 10 to 20 percent of office real estate stock could end up repurposed or removed.

“However, we do not expect a mass departure from office buildings going forward— even under the most pessimistic scenarios,” the report states.   

4. Brick-and-mortar stores will have the chance to reclaim market share as online spending growth slows.

Excluding auto sales, e-commerce has declined from 20 percent of total retail sales during the initial pandemic lockdown to just below 18 percent, according to PwC. As online shopping growth slows, physical retailers will have the opportunity to take back some of the market share they lost during the height of the pandemic. The report predicts that stores that “bridge the gap between e-commerce and brick-and-sticks” and those that provide exceptional experiences will see the most success.    

5. More environmental, social and governance (ESG) compliance requirements are on the horizon for commercial real estate firms.

The commercial real estate space must prepare for new ESG regulations, according to Deloitte’s 2023 commercial real estate outlook. “Real estate companies will need to learn about potential regulatory changes and adopt practices to comply with reporting requirements,” the outlook states. The Avalon Realty team has experience with green techniques (e.g., retrofitting buildings with LED lights) if you’re interested in energy-efficient building design.

If you’d like to learn more about commercial real estate trends in Chicago and nationwide, don’t hesitate to reach out to Avalon by visiting our contact us page. You can also call us at 847-506-1000 or email info@avalonreal.com for information about our commercial real estate services.