2023 commercial real estate M&A outlook


2023 commercial real estate M&A outlook

A tale of two markets

In 2022, commercial real estate mergers and acquisitions split into two opposing directions. Many sectors enjoyed a surplus of M&A activity, followed by a sudden drop as inflation and interest rates dominated the market. Industry executives that are well-researched on rising trends will be better prepared as we move through 2023.

A look at real estate mergers and acquisitions

The pandemic has reshaped and reprioritized where and how people live, work, and play, and their choices are exerting major influence on commercial real estate (CRE) industry mergers and acquisitions (M&A) activity. Performance measures across the industry make one thing abundantly clear: sector matters.

  • The industrial sector now is viewed as largely recession-proof by many industry observers. That may be true for existing facilities, but the fate of new construction is less clear.
  • Residential assets, including apartments and single-family rentals, will likely continue to do well. Among the reasons: the ability to pass along inflationary cost increases in annual rent hikes, a strong overall employment trend despite tech- and entertainment-industry layoffs, and households that appear eager to remain independent.
  • We expect REITs to reenter M&A as rates stabilize or drop, but private REITs are in a different position. While we don’t foresee private REITs fading in coming years, it’s possible that non-traded REITs will face heightened regulatory hurdles in 2023 or soon afterward.
  • Office sector performance will depend largely on where buildings are located and how updated their amenities and sustainability profiles are. While pandemic-era dust has not yet settled on the work-from-home model, it seems likely that business has returned to normal, but not to the office. With low enough prices and/or sufficient government incentives, Class B or C buildings potentially could be converted to affordable housing.

Read more about real estate industry trends across office, industrial, retail, hotel and leisure, residential, and nontraditional sectors, and see our full real estate M&A outlook for 2023.

2023 real estate M&A drivers and trends

To adapt and grow in the future, real estate executives should consider how to address the following global and US-specific trends.

Opportunities and challenges for CRE M&A activity in 2023

The year’s greatest mergers & acquisitions opportunity will likely lie in market distress.

While the Federal Reserve instituted a mild quarter-point increase on February 2, 2023, the hike pushed the federal funds target rate from 4.5% to 4.75%, and Federal Reserve officials suggested that rate increases were not yet over. Within our current M&A market outlook, we believe that high rates are likely to continue for part, or all, of the year. For CRE M&A, we expect the first half of 2023 to be much like the fourth quarter of 2022, with M&A activity to begin picking up in 2023’s second half. Some sectors may see a flurry of activity from pent-up demand, while others may remain quiet.

Whether or not a short-term or shallow recession materializes, acquirers may be able to scoop up assets for below-market prices. Internationally, 2023 may be a good time for US companies to look for assets abroad. Taking advantage of the strong dollar now may be wise given that the dollar may fade during the year.

Looking back on 2022

In today’s rapidly evolving marketplace environment, key business issues are converging with impacts felt across multiple industry sectors. What are the key trends, challenges, and opportunities that may affect your business and influence your strategy? Look for more perspectives and insights from some of Deloitte’s forward thinkers.

Take a look back at the M&A activity and trends that reshaped the sector in our 2022 outlook.

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