Posted on January 25, 2023
LPA’s Research Team Believes CRE Will Remain Resilient in 2023. Here’s Why.
Last month, we asked LPA thought leaders Jake Allen (Director, LPA Lubbock), Drew McFarland (Senior Managing Director, LPA Dallas), and Mark Lowery (Principal and CEO) to discuss what they expect from the commercial real estate (CRE) industry in 2023.
Overall, Jake, Drew, and Mark believe CRE will continue to attract buyers and investors over the next 12 months, with industrial and multifamily properties across the Southwest continuing to outperform asset classes in other markets. But they also agree that a big question is looming: will 2023 be as up-and-down as 2022 was?
So we asked the LPA Team members who take daily deep dives into market data and trends — Senior Associate Researcher Andrew Burns and Associate Researcher Ashley Travis — to share their unique expertise and perspectives on this and several related questions.
The Role of Research at LPA
Before we reveal what Andrew and Ashley see on the horizon, we want to provide some important context for their observations and conclusions: a full account of their day-to-day life at LPA.
The bulk of Andrew and Ashley’s work consists of:
- Extracting transaction and market data from multiple sources, both industry-standard (CoStar) and niche.
- Aggregating that data.
- Organizing that data and attaching it to specific appraisal projects in LPA’s proprietary database.
- Constantly updating that data to keep it as current — and relevant — as possible.
- Visualizing this data in the form of tables and charts that populate LPA’s appraisal reports.
- Working on special projects. Such projects have included:
- Conducting — “from scratch” — market analyses for new asset classes and locations.
- Managing an investment survey sent to 400-plus stakeholders.
- Creating a new standard element of all LPA appraisal reports: an economic update tracking unemployment, energy prices, etc., and noting these economic factors’ potential impact on property values.
“Our goal is to give the appraisers more bandwidth so they can work more efficiently,” Ashley summarizes. How much more efficiently? Andrew has done the math. “On average, we’re working 10 to 15 projects a day,” he says. “Over the course of a year, that’s more than 3,000 projects where the appraiser can focus on providing their analysis and unique insights.”
Staffing a dedicated Market Research Team has been instrumental in helping LPA grow while maintaining its reputation for 100-percent on-time delivery and exceptional customer service. An anecdote from Andrew illustrates how. “The typical turnaround time for an appraisal report is approximately three weeks. But as the economy has softened and transaction volume has slowed, we’ve taken on more projects that need to be turned around in 1 week,” he says. “Being able to lean on a dedicated research team gives our appraisers the agility they need to meet those accelerated deadlines.”
1) Based on its 2022 performance, which property type/asset class is facing the strongest headwinds entering 2023?
For Andrew and Ashley, the answer is crystal clear: office.
This is partly because office properties are caught up in what may prove to be the most significant and enduring cultural change to occur during the pandemic: the shift to fully remote and hybrid work.
A study conducted by the U.S. Survey of Working Arrangements and Attitudes (S.W.A.A.) in December 2022 found that employees prefer to work from home three days a week. Their employers, however, would prefer to see that number drop closer to two days per week. Although, as The New York Times reports, “that’s not a big gap in expectations,” hard stances against remote work taken by prominent business leaders like Elon Musk and Bob Iger suggest otherwise.
“Analysts at Moody’s found that office vacancies dipped in 2022 but are not yet back to pre-pandemic levels. So, companies are going back to the office. But they’re proceeding slowly, and not as many are returning.” Andrew posits. “It will be interesting to see what companies will do. Will they issue ultimatums or offer perks and amenities to get employees interested in office life again?”
However, time may be running out. Ashley believes 2023 will be “a make or break” year for office. “Many leases are expiring, meaning vacancy rates could spike, driving down the value of surrounding properties,” she cautions. “A lot is riding on the decisions corporate executives make in the coming months. State-of-the-art Class A buildings with modern amenities should continue to perform well, but demand for older buildings will probably be soft. We may even see some properties that would have been considered Class A before the pandemic downgraded to Class B.”
2) Which asset classes might actually benefit should inflation continue to climb in 2023?
Andrew expects industrial to do as well, if not better, in 2023 than in 2022. Why? “As companies continue to increase the production of goods that have been in demand since bouncing back from the pandemic, they will need to continue renting or buying warehouses to store that inventory. Because of this and the growth of e-commerce, industrial looks to be an asset class that can hold its value even if consumer activity causes inflation to heat up,” he explains.
Adds Ashley: “Many retailers are likely switching to a strictly e-commerce presence and need fewer storefronts. But they’re replacing them with distribution centers and last-mile delivery services.”
From 2017 through 2021, the last-mile delivery segment achieved a compound annual growth rate (CAGR) of more than 18 percent. Third parties specializing in freight and trucking have benefitted the most from the consumer demand for same- and next-day shipping, but logistics-as-a-service providers are poised to reap more of those benefits in 2023. At the beginning of the year, Amazon announced that it would be significantly expanding its Buy with Prime program, which “allows merchants to pay Amazon a fee to store and deliver products, handle returns, and process payments.” Amazon certainly has warehouse space to spare, having acquired over 260 million square feet of industrial since 2020.
3) Which markets in the Southwest are primed for continued growth in 2023?
When ranked according to such key metrics as “workforce,” “cost of doing business,” and “technology and innovation,” Texas is one of the most business-friendly states in the U.S. Even in the face of a possible recession, economists remain bullish on Texas because of its low unemployment and population growth.
These trends most favor the Lone Star State’s major metropolitan areas. “As Texas’ big cities draw more and more people to relocate there, we expect to see increases in almost every asset class. Those major metros also have the infrastructure to handle the increased demand for years to come,” observes Andrew.
Among those asset classes, Ashley sees the greatest potential for growth in multifamily in Dallas-Fort Worth, Houston, Austin, and San Antonio. “The multifamily sector shows no signs of slowing down as many people migrate to the area,” she says. “Many consumers will remain renters as well, considering current home prices and high interest rates. This leads to greater demand for affordable housing and apartments.”
Waco, an up-and-coming market in Central Texas, may be leading the way in satisfying that demand. Last September, its Tax Increment Financing (TIF) Zone board allocated almost $3 million to “subsidize the construction of workforce housing” on city-owned land.
4) Which proptech innovation will have the most significant impact on the industry in 2023?
Ashley sees the greatest potential in the industrial metaverse and digital twins. “Many multifamily properties already use 3D models to allow stakeholders to view spaces virtually and take measurements,” she explains. “As other sectors adopt virtual and augmented reality technology, it will enable appraisers to save time on inspections and work more efficiently.”
Andrew, on the other hand, believes robotic process automation (RPA) and advanced data orchestration will alter the CRE landscape even more than they already have. “We’ll see an increase in the use of artificial intelligence (AI) in 2023 as it becomes more highly developed and more companies lean into using it,” he predicts. “Some companies are also already connecting their AI functions to the blockchain so they can secure this automated data more efficiently. It’ll be interesting to see how AI might help our appraisers be even more accurate and efficient.”
5) What one word sums up the commercial real estate outlook for 2023?
Andrew’s choice is “competitive.” Why? “As transactions decrease, demand for the most up-to-date data and trends will increase. Investors want the latest information to help them navigate what’s always a volatile market,” he asserts. “At LPA, we understand that we need to stay on the cutting edge of technology and integrate it with our business and systems.”
Ashley opts for “resilient,” and her reasons have much to do with technology, data, and the enduring value of business intelligence. “The CRE industry has always been and will always be cyclic,” she notes. “Using innovative proptech and better data, the industry will demonstrate that it’s capable of navigating challenges and adapting to present economic conditions.”
LPA’s valuation services span the complete spectrum of commercial real estate property types, including those unique asset classes that require additional attention, research, and assessment.
- Retail, from strip centers to restaurants, bars, and taverns.
- Office, including suburban offices and medical and dental buildings.
- Industrial: manufacturing facilities, warehouses, distribution centers, data centers, and more.
- Multifamily: apartments, condominiums, townhomes, duplexes and triplexes, senior housing, mobile home parks, etc.
- Developments and subdivisions, including age-restricted and master-planned communities.
- Self-storage facilities (indoor, outdoor, climate-controlled, etc.).
- Hotels, motels, extended stay lodging, resorts, and casinos.
- Car washes, auto repair shops, auto dealerships, and gas stations.
- Special purpose: schools, places of worship, sports facilities, assisted living facilities, parking lots, going concerns, and more.
- Vacant land, from greenfields to lakefront properties to forest holdings.
- Right-of-Way and Eminent Domain
No matter what your commercial property valuation needs might be, the regional experts on our Appraisal and Market Research Teams will provide you with accurate, USPAP-compliant reporting and on-time delivery every time.
Contact any of our 8 Texas locations today to learn more about what we do and the clients we serve.