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After enduring historic turmoil in 2022, the commercial real estate industry has gotten off to a promising start in 2023. Market analysts expect the Federal Reserve to start reversing its recent rate hikes this year. And industry insiders believe the sector can reduce the impact of economic uncertainty by integrating and deploying innovative technology.
Most importantly, there are indicators that the real estate markets in the three important metropolitan areas are pulling out of the downturn that affected the sector nationwide last year.
The ramp-up of metro commercial real estate opportunity generation - in multiple property types - is something every development team should be watching this year.
Detroit’s Commercial Real Estate Market is Revving Up
Detroit is shifting gears to becoming a hot metro real estate market this year thanks to the imminent opening of several high-profile, large-scale development projects.
Motor City is in the middle of a major urban renewal, spearheaded by Ford Motor Company’s renovation of Michigan Central Station. The car company began transforming the iconic 13-story former railroad depot into a mixed-use complex in 2018, a process delayed by COVID-19. The revamped building is finally set to reopen in mid-2023 with offices for 5,000 workers, restaurants, shops, a hotel, and event space.
Ford intends for Michigan Central Station to anchor a $950 million “innovation district” that features a startup incubator, micromobility testing platform, and mixed-use commercial and public space.
Detroit’s urban core is also getting a boost from the launch of some hotly anticipated multifamily complexes in 2023. The historic Book Tower and Book Building offices are being transformed into 229 apartments and 118 extended-stay hotel units. Similarly, The Exchange, a 165-unit high-rise apartment and condominiums complex made with eye-catching LIFTbuild technology, is set to open this summer. And Lafayette West, a stylish 318-unit downtown housing development, will start accepting its first residents in the summer.
In addition, Motown is in the process of significantly expanding its life sciences real estate inventory. Construction on the Detroit Center for Innovation, a 200,000-square-foot University of Michigan research and education center, is scheduled to begin construction later this year.
With its civic rejuvenation back on track, Detroit is now cultivating major opportunities for real estate development.
Like most other metros, the city is home to many underutilized office buildings that could benefit from reinvention. Following the COVID-19 outbreak, 42% of companies transitioned to a hybrid workplace model that accommodates onsite, flex, and remote employees. Since hybrid sites need less space than traditional offices, many businesses are moving to offload inventory. Development teams can capitalize on the trend by making deals to convert former corporate properties into apartments or self-storage facilities.
Even though many residential spaces are opening in Detroit this year, local experts believe the city still needs more affordable housing. The Exchange and Lafayette West primarily feature luxury apartments and amenities for tenants interested in $500,000 condos. But the expanding footprints of Ford, the University of Michigan, and other employers will increase demand for middle-class living spaces. Indeed, the metro saw a 44.2% annual increase in inbound business moves last year, with salaries averaging $60,897 per year.
Development teams that don’t miss out on reputation-defining opportunities should keep an eye on Detroit this year.
Alamo City gained over 13,600 new residents in 2021, the largest annual population increase of any U.S. city. The National Association of Realtors published a report crediting the area’s job growth, affordability, and available housing as the main reasons for expansion.
San Antonio’s recent influx of newcomers hasn’t hurt the local employment market. The metro added nearly 50,000 jobs annually in 2022, reducing its unemployment rate by 0.7%, and many of those newly-created positions are well compensated. The area saw its information technology job postings- which pay an average of $76,558 per year - increase by 80% year-over-year. Since the minimum annual income required to purchase a home in the city is $85,000, and its demand for multifamily space is weaker than the national average, housing is available.
The Central Texas metro’s attractive employment-to-population ratio, cost of living, and home market have given it a powerful quality-of-life appeal, which has positively impacted local property markets.
While mounting recession anxiety has diminished non-essential consumer spending in recent months, the Sun Belt city is an exception. Due to strong demand, San Antonio’s retail real estate occupancy rate stood at 95.3% in Q3 2022. CBRE noted the segment has benefited from an upswing in leisure travel, with airport traffic up 20% and restaurant reservations climbing 28%. However, development activity hasn’t kept up with the market. The amount of retail space under construction declined from early 2022, with one area only seeing two projects delivered last fall.
The area’s industrial real estate market is also bucking national trends on account of robust demand. The city absorbed 8.7 million square feet of space in the third quarter – a new record – and its vacancy rate fell to 4%. Moreover, asking rents for warehouse and distribution space jumped 16.8% annually. Developers are working aggressively to address the spike in interest, especially from large tenants; 32 projects entered the construction phase in Q3, with 24 exceeding 100,000 square feet.
The increasing strength of San Antonio’s commercial real estate market is driving the revival of its coronavirus-ravaged office building segment. The region recorded positive absorption of more than 120,000 square feet of workplace space, and two buildings featuring a combined 179,996 square feet broke ground last fall. And even though 1,089,000 square feet of inventory is under construction, 100% of the area’s Class A properties have been pre-leased.
The Federal Reserve Bank of Texas determined that San Antonio had gained more jobs than it lost to COVID-19 as of September 2022. If that trend continues, the metro will continue cultivating development opportunities.
Chicago is Making a Major Comeback
Chicago’s real estate market faced several major challenges in recent years, but it's headed for a “Flu Game” level comeback in 2023.
Although the metro’s office property market was hit hard by COVID-19, adversity has turned into an opportunity. The Central Business District absorbed more than half a million net square feet of space last fall. That’s the most workplace inventory Loop-area tenants have gobbled up in one quarter since late 2015. Employers have successfully brought remote staffers back onsite by securing newly renovated spaces with solid building amenities.
CBRE’s most recent Office Occupier Sentiment Survey indicated 73% of businesses intend to adopt the hybrid workspace model, an attitude that could bolster and sustain Chicago’s return to the office trend.
Another one of Windy City’s biggest development opportunities is in its industrial sector, which is impressive since the national e-commerce real estate bubble burst last year. Kraft Heinz Food Company, Post Consumer Brands, Uline, and other corporations’ need for local warehouses and logistics facilities to support their e-commerce efforts pushed the area’s occupancy rate to 97.5% last year. The intensity of new and renewed leasing activity also drove asking rents to $5.94 per square foot, its highest level since 2016.
However, construction starts and completions fell by over 20% from 2021 in Q3. Investor concern about soaring inflation, record-high interest rates, and rising labor and materials costs tempered the market’s growth. Despite those headwinds, Chicagoland real estate experts believe industrial demand will remain healthy throughout 2023.
Finally, the Second City’s multifamily sector will have significant development potential in 2023. Quality apartment complexes in the area are commanding record-high rents because of intense public interest. Developers are addressing the trend by working on completing around 6,900 units by the end of 2024. Even so, Google, Kellogg, Mars Wrigley, and other corporations recently pledged to expand their local footprints, attracting even more workers to the Loop.
Since Chicago’s multifamily sector had an occupancy rate of 97.6% in 2022, the need for more living space is clear.
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