What is the state of commercial real estate? Which asset class will hurt the most next year?

What is the state of commercial real estate? Who will be selling next year in 2023? Which asset class do we think will hurt the most next year? Deidre Wollard, a writer and editor at The Motley Fool will share her insights.

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What is the state of commercial real estate today?

It is an interesting time. It has always an interesting time in real estate. Right now, I feel like everybody is waiting for something to happen, which is really interesting. We're certainly seeing that on the residential side, because the housing market is sort of on pause. And we are seeing that on the commercial side as well, interest rates are so high that people can't get access to capital the way they could. And there's that little uncertainty about what's next in the overall economic sector. Are we headed into a recession? Consumers are spending a lot right now, is that going to shift? All of that uncertainty is leading to a bit of a lack of deal flow from what I've seen.

Which asset class do you think will be the one that is most hurt next year?

I think it continues to be office, office has really struggled. We are also starting to see a little bit of a weakness in industrial. That has been happening ever since Amazon about three or four months ago made a statement about looking at their warehouse spacing, we have seen that sort of fall throughout the industry. So there's a little bit of a weakness starting to happen in industrial. Overall, it's nothing to worry about. But with office, the question I keep asking myself is, is this a permanent shift? And I think my viewpoint on that has changed throughout the cycle as different things just keep happening. Because the employers are starting to have more of the power, you're getting more and more employers demanding people to go back to the office. That is one reason that I'm getting a little bit optimistic about office.

When you invest in your next deal, what asset class is more interesting to you right now and why?

Multifamily is forever interesting, because we're never going to run out of need for it. And it's not as much driven by what happens with the economy. Rent prices right now are definitely stabilizing, the question though is where are we overbuilding and that's the thing that's really important to watch because we saw so much activity flow into the Sunbelt, both before the pandemic and during, and that's moderating a bit. You see some of these hot markets get a little different and you start to wonder, are we building too much in Austin, Texas, for example, and start to think about, where's the money going next? Where are the people going next? That I think that is the puzzle that is most interesting.

I think hotels is an interesting one to follow. Because when we look at consumer behavior, everybody spent on goods during a portion of the pandemic, then everybody switched over to experiences, and that changed the forecast of hospitality. The longer term trend that I'm watching there that I think is really interesting, is what we saw with Airbnb and long term stays, they saw their 28 day and higher stays keep growing.They announced recently that they're now letting apartment renters rent on Airbnb, which is interesting. At the same time, you've got Marriott, that just announced Apartments by Bonvoy, which is basically, medium term rentals of more apartment style units. There's something happening there with medium term 30 to 90 days, stays, I think that's an area to keep an eye on.

Deidre Wollard at The Motley Fool

twitter.com/deidre

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