Amazon entered 2022 as one of the most important drivers of commercial real estate trends. Its seeming insatiable demand for industrial space (both as an occupant and as an owner) helped send the sector’s vacancy rate to microscopic lows while driving rents to new record highs. Its experimentation in various retail formats was also something the industry was keeping an eye on.  

Then, suddenly, Amazon reversed course. In the spring it shuttered several of its retail concepts entirely and put a portion of its industrial real estate space up for sublease. Amazon’s moves were not enough to stem the momentum in the industrial sector, but it did send some shudders into the marketplace. Some pointed out, for example, that most of real estate Amazon was vacated was obsolete older warehouses and smaller facilities that don’t measure up to the behemoth’s current standards.

What Amazon does next will be of big interest in 2023. 

Aside from the core major commercial real estate property types—multifamily, industrial, office, retail and hotels—there are a number of alternatives that have established themselves as strong plays, including student housing, single-family rentals, seniors housing, manufactured housing, medical office buildings, life sciences and self storage.

Yet there are some real estate investors going even further off the beaten path in establishing new specialty property types. A couple of segments—cell towers, RV parks and data centers—are further along that path. But some newer ones that some investors have begun to specialize in include early child development centers, veterinarian real estate and car wash real estate.

One of the sectors that got a surprising new lease on life in 2022, in spite or rising rates and fears of a recession, was retail real estate. The bleeding from store closings has stopped, as healthy retailers completed the process of portfolio optimization, and unhealthy ones already exited the market. Leasing activity has steadily improved. Tenant demand for retail pad sites has risen as some retail and restaurant operators rethought their site selection preferences. And given that retail assets have not seen astronomical price increases over the past few years, in a period of rising rates, they can suddenly seem more attractive than more expensive alternatives, leading to strong demand for bets on, for example, grocery-anchored shopping centers, though the buyer composition is changing.

While there’s been some pushback against so-called “woke capital,” the overall push to embrace environmental, social, and governance (ESG) principles continued to move forward in 2022.

Within the real estate sector, that’s taken on several forms. It includes a push to diversify the industry’s ranks—an effort that continues to develop at a slow pace. And sustainability is another front, given that buildings account for a significant percentage of carbon emissions.

Pressure will build on continuing to improve on ESG measures in 2023, especially as the SEC’s proposed climate disclosures continue to get refined and then implemented. There will be unique hurdles that real estate investors face. But one place to look to how best to implement it is with publicly-traded REITs, many of which already regularly report on these issues.

Big institutions are also changing how they assess climate risk within their portfolios, including shifting how they plan to deploy capital going forward. And there also signs that tenants, particularly in office buildings, do value sustainable and wellness features.

Nearly three years after the start of the pandemic that sent many white collar workers home, nobody has quite figured out how exactly the hybrid office schedule is supposed to work. That lack of clarity has put the brakes on a mass return to offices in many markets.

At the same time, neither the widespread distress that many market observers foretold for the office sector in the past few years nor mass conversions of office buildings into apartment properties have materialized. What has happened is a surprising bounce back in demand for co-working space, as people tired of working from their kitchens looked for an office substitute and businesses tried to become more flexible with their office usage.

And while there has been some blowback from rising interest rates in the past few months, investors continued to bet on office buildings, as long as those buildings offered attractive amenities and were located in desirable markets.

As we near the start of 2023, industrial assets still appear to be in a historically strong place. But it’s hard to deny that both property fundamentals and investor demand have fallen off a bit from the crazy highs of the past few years.

This has to do with both a sizeable pipeline of new construction coming on-line and somewhat of a slowdown in outsized demand for new space that occurred in 2020-21 as many people shopped online instead of in stores. So while rents are still rising at a brisk pace, in a number of markets, they are not catching up to recent double-digit growth.

One of the sector’s major tenants, Amazon, made the decision to sublease some of its warehouses as it realized it over-expanded its real estate empire. And faced with resizing interest rates, some investors began pulling out of existing industrial bets, while others put the brakes on new industrial acquisitions.

Residential rents rose at a blistering pace for much of 2022, only slowing in recent months. At their peak year-over-year increases in some markets were north of 20 percent. The increases were felt across all multifamily apartment classes as well as the single-family rental space. Only in the past few months have signs emerged that the punishing pace of rental gains might finally be tapering.

Rapidly rising rents, which have come amid inflation across the board, have brought new focus on America’s lack of affordable housing. In turn, this is sparking some renewed discussions on rent control. Voters chimed in in ballot measures across the country in November’s midterm elections and industry experts expect more fights in 2023. For example in Boston, where rents rose by as much at 17 percent on an annual basis at one point, a renewed push for rent control has been playing out for months. New York also witnessed skyrocketing rents. According to one metric, only 23 percent of New Yorkers can afford median rents. In addition, an unusually high number of units being held off the market has created further tension, which should continue to play out in 2023.

There have been creative solutions as well. For example, colleges resorted to building affordable housing for some staff in markets where rents got too high. And Fannie and Freddie have put a renewed focus on trying to finance workforce housing as part of their funding mandates.

And the struggle over the lack of affordable housing promises to continue to be a major theme in 2023. 

The Fed’s multiple interest rate hikes this year have turned the market for real estate investment sales upside down. Within a matter of months, the Fed’s key interest rate went from a range of 0.25 percent to 0.50 percent in March to a range between 4.25 percent and 4.50 percent today, the highest level in 15 years.

Financing terms became more expensive even for investors in property sectors lenders continue to favor, such as multifamily. Industry players that rely on leverage to build up their portfolios had to adjust their financing strategies, from seeking assets with assumable loans to working with smaller banks to turning to private equity debt providers to fill funding gaps.

But even with investors finding workarounds for securing affordable financing, they’ve become much more shy about pulling the trigger on new acquisitions in the second half of the year and even started to pull out of some ongoing negotiations. This has affected properties across the spectrum, from multifamily and industrial to traditional office buildings and SFRs to medical offices, life sciences, self storage and student housing.

In recent months, the industry has also seen some cap rate expansion, as a result of the higher cost of capital. Even the net lease market, one of the most stable sectors of the commercial real estate industry, has not been immune to a reset in valuations under current conditions.

One of the biggest challenges Americans faced this year was high inflation, which reached levels not seen in decades. In November, the U.S. Consumer Price Index registered a 7.1 percent increase from a year ago, though the annual pace of inflation has begun to drop compared to the peaks recorded during preceding months.

On the one hand, such rapid increase in consumer prices added worries about the potential of an upcoming recession, with people cutting back on discretionary purchases and services (this hasn’t happened so far). Rising inflation did seem to finally put a damper on the rent increases multifamily owners could charge their tenants, leading to a more subdued outlook for the multifamily sector in the year ahead.

On the other hand, investment in commercial real estate has traditionally served as a hedge against inflation, and industry experts once again advised investors to stock up on income-producing real estate assets. That has been especially true for the types of commercial properties that have shorter leases and can more readily adjust their rental rates to reflect the rising cost of operations, including hotels, self storage and multifamily.

As the country and the world faced both new and lingering challenges in 2022, "uncertainty" became the key word for commercial real estate investors. There was uncertainty about the economic outlook, uncertainty about how many times the Federal Reserve would raise its key interest rate and by how much, uncertainty about when peace might return to Europe, uncertainty about the energy markets, uncertainty about true asset values and uncertainty about when we would finally see the last of COVID’s many effects on commercial real estate disappear for good.

It still doesn’t seem entirely clear whether we will experience a recession in 2023 or how severe it might be if we do, but commercial real estate economists have offered some protective strategies for investors if we do. At the same time, the industry confronted several major interest rate hikes this year after a long period of near-zero rates, with more likely to come in 2023. That, along with persistent inflationary pressures, has led to investors reassessing which property types they should be allocating their money to. It has also led to higher financing costs and a slowdown in investment sales almost across the commercial real estate universe, as buyers realized they may be looking at lower yields than they did before, while many sellers held onto hope they won’t have to cut asset prices.

At the same time, there was uncertainty related to structural issues within certain sectors, such as industrial property owners continuing to deal with supply chain problems, property sectors including office and hotel remaining in the recovery period after being hit by COVID, and the war in Ukraine leading to volatility in oil and gas prices, with impact on many aspects of life, from office demand in Texas to construction materials pricing.