January 2023

6D — January 2023 Forecast — M id A tlantic Real Estate Journal


2023 F orecast

By Alessandro Conte, CCIM, SIOR, The Blau & Berg Company Looking forward to 2023


emand for industri - al real estate in the northeast had been

its’ citizens to stay home and lower interest rates to stimulate the economy. This was an unprecedented global phenomenon. The after-effects of this would create massive inflation, and increased demand for goods, especially automo - biles and luxury items as well as construction. This unparalleled demand cre - ated an enormous strain on the supply chain both on the production/manufacturing end as well as the warehouse logistics end. To combat supply chain

issues, we saw an “over- correction” on the part of e- commerce companies, logis - tic companies, and institu - tional investors. Sale prices and lease rates soared, and speculative construction moved only as fast as the land could be purchased and developed while leasing velocity outpaced the three prior cycles. Fueled by the low cost of debt it appeared that no end to this cycle was in sight. Unfortunately, in March of 2022, the Federal Reserve be - gan raising rates for the first

time since 2018 to combat rising inflation. Seven total rate hikes in 2022 brought rates from 0.25% to 4.5% in just nine months. This sud - den, drastic increase in rates all but put the brakes on the locomotive-like momentum the industrial real estate market was experiencing. Investors were diligently trying to keep up with the continuous change in the cost of funds while still trying to be competitive with pricing. Property owners, who were previously cajoled into sell - ing by record-setting prices,

were now seeing a retreat into those values and decid - ing to hold on. Industrial lease rates mostly remained steady in 2022 despite a cor - rection in sale prices. Looking forward to 2023, the federal reserve has hint - ed at potentially two more rate hikes as it continues to combat inflation. Gener - ally, the effects of federal rate adjustments can take months to realize. In this case, we may not truly feel the effects until the second or third quarter of 2023. The supply chain issues seem to be largely corrected outside of the coveted semiconductor chips. It is safe to say that investors will continue to look to get 1-2 points higher returns on real estate than in the bond markets. Essen - tially, a property that was throwing off a Net Operating Income (NOI) of $1,000,000 could have traded for a cap - italization rate of 4% or $25,000,000, may be trading for a 7% capitalization rate this year, or $14,285,715. This is a $10,714,285 reduc - tion or a 43% drop in value. Typically, when we see this type of change in the value, we find that the “institution - al investor” gets priced out of the market and the “user/ tenant” becomes the buyer. Therefore, there is poten - tial for a 20% correction on both lease and sale values and a shift in the buyer pool back to the users. We can also expect vacancy rates to tick up slightly higher due to decreased demand. I expect that 2023 will be seen as a correction year for markets that were artificially inflated because of the pandemic, but we will go into 2024 with fur - ther stability, provided the unemployment rate remains relatively low. Alessandro Conte, CCIM, SIOR, is Executive Vice Pres- ident and principal of The Blau & Berg Company. MAREJ the “Old Forge Difference” and market knowledge, growing upon the impact we have pro - vided for four decades. MAREJ continued from page 3D Specialty service- oriented retail growth is a sure bet for 2023

on a steady climb since 2011. As we approached the natural “life cycle” of a typical 7–10-year growth pe - riod we were faced with a

Alessandro Conte

pandemic in 2020. The loom - ing repercussions of the lockdowns forced the hands of lawmakers to subsidize


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830 Morris Turnpike, Suite 201, Short Hills, NJ 07078 973.379.6644 www.blauberg.com Since 1932, The Blau & Berg Company has held a leading position in the New Jersey and Tri-State commercial real estate market. As an independent, full service commercial brokerage firm, we provide an array of services in the industrial, retail, multifamily and office fields. . . . . .

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