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Here's What the World's Largest Commercial Real Estate Firm Anticipates In 2023 and Beyond

Motley Fool - Fri Jun 2, 7:30AM CDT

It's been a tale of two sectors in the stock market over the last several months. Tech stocks have boomed while financial and bank stocks have struggled. The failures of SVB Financial's Silicon Valley Bank, Signature Bank, and, more recently, First Republic Bank have led to a pullback in lending as banks tighten their belts and shore up their balance sheets.

One area drawing concern from investors is commercial real estate (CRE). CBRE Group(NYSE: CBRE), one of the world's largest commercial real estate companies, discussed this during its earnings call in April. In that call, it revealed the causes behind the slowdown in commercial real estate, along with its expectations for the next year and beyond. Here's what it anticipates, along with potential investment opportunities and areas to avoid for now.

The world's largest commercial real estate company sees these headwinds

CBRE Group runs the world's largest commercial real estate services and investment firm. Its business involves property sales, mortgage origination and servicing, property management, and other services for investors and occupants.

Its position as a top commercial real estate company gives it unique insight into these markets, which can provide investors with clues as to what could happen next. During its earnings call, the company told investors that commercial real estate has faced several headwinds in recent months.

For one, an uptick in inflation has caused the Federal Reserve to raise interest rates aggressively to bring it down. Higher interest rates affect the market value of $3 trillion in CRE loans outstanding -- many of which will eventually need to be refinanced at higher rates. Stress in the banking system has resulted in a strong pullback in lending for the industry. According to The Wall Street Journal, regional banks hold 67% of all CRE loans outstanding.

Here's what it thinks will happen over the next year

Current conditions have made it difficult for capital markets, and it is becoming more challenging to find funding in the commercial real estate market. CBRE also said it expects property sales to fall by 20% during this year, which would be a 25% fall from peak levels in 2021.

The company expressed more uncertainty in its outlook compared to earlier this year. In February, it said it expected a recovery from the current downturn during the second half of the year. After the fallout from the collapse of Silicon Valley Bank and others, CBRE now anticipates pressure on its transactions business to intensify during the year. CBRE also said it expects a moderate recession later this year, leading to a reduction in interest rates by the Federal Reserve and a rebound in economic activity in 2024.

Two people talking outside an office building.

Image source: Getty Images.

Some areas of commercial real estate could take longer to recover than others

CBRE sees emerging investment opportunities and areas investors should avoid over the next year. It foresees office properties as one area of commercial real estate that will struggle.

During the pandemic's height, there was a huge shift to remote work. Technology has enabled companies to offer work from home to employees. Many employers have transitioned to people working from home full-time or part-time, reducing their need for office space. Because of this, CBRE believes that valuations on office properties will take twice as long as the recovery after the 2008 global financial crisis. It believes that office portfolios will continue to be a large part of commercial real estate, but a smaller market component as companies adapt.

One area where CBRE sees an opportunity is in industrial and multifamily properties. It noted that many commercial real estate transactions today involve industrial and multifamily assets, and this segment could prove to be more stable during a downturn. It believes valuations of properties in this area will fully recover in two to three years -- half the time they took to recover coming out of the 2008 financial crisis.

Investors should keep an eye on these investment opportunities

Investors will probably want to avoid office property operators such as Vornado Realty Trust and SL Green Realty, as their properties will take much longer to recover.

However, there could be excellent opportunities to buy companies in the industrial and multifamily markets over the next 12 to 18 months. Walker & Dunlop is one of the largest multifamily companies that could take advantage of the pullback in lending to expand. Other industrial REITs to look at for investment opportunities are Prologis and Stag Industrial.

Commercial real estate will likely face pressures because of constrained lending conditions. However, patient long-term investors could use further market volatility as an excellent opportunity to invest in those stocks that could bounce back quickly during a subsequent market recovery.

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SVB Financial provides credit and banking services to The Motley Fool. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Prologis, Stag Industrial, and Walker & Dunlop. The Motley Fool recommends SVB Financial. The Motley Fool has a disclosure policy.

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