The Azucena Take: Commercial Construction Trends in 2023

Supply risk is a concern that investment property owners think about. It's understandable that an investor fears the impact a new building will have on their holdings. However; there are greater supply risks at the moment and it will actually affect investors.

The biggest is the ongoing supply chain issue and rising interest rates. These challenges have caused significant issues for new real estate construction and seasoned investors alike.

As we settle into 2023, it is worth examining the trends in commercial investment construction that we can expect to see.

Current State

How We Got Here

A breakdown of the price of raw materials / transport as of February 2023:

  • Lumber is at $600 per 100 board feet

  • Steel is at $900 per ton

  • Concrete is at $130 per cubic yard

  • Freight is at $1,200 per container

As we all remember, the pandemic caused everything to shut down, including construction projects and the processing of raw materials. Although things began to return to normal by late 2020 and early 2021, there was a major issue: industries and producers of raw materials were not prepared. This led to an inflation crisis, resulting in an increase in interest rates in 2022 and further expected increases in 2023.

Challenges of 2023

Although the supply chain crisis has subsided, a new challenge has emerged in the form of interest rates and financing. Currently, the interest rate ranges from 4.5% to 4.75%, which is making it difficult to obtain affordable construction loans. Financing has become increasingly volatile, with interest rates for banks ranging from 8% to 9%. While alternative financing options are available, they are not necessarily a better option, as they can come with higher rates ranging from 8.75% to 10.5%.

Thus; construction projects are being pushed to the sideline. So what can we expect to see in 2023? Here is a breakdown of the new inventory that will become available by the end of 2023. 

  • 400,000 new apartment units

  • 400 million sq ft of industrial space

  • 42 million sq ft of retail space

  • 86 million sq ft of office space

The big question is will this meet demand? For now, demand has settled for most property types. Analysts expect it to pick up closer to or around 2024. 

What it Means for Investors

Investors who do not plan on upgrading their existing properties may not be affected as much by the current challenges in financing and interest rates. However, those who are planning to upgrade may face an uphill battle. Loans to add an ADU (accessory dwelling unit) or expand an existing building may be harder to obtain due to the current volatility in financing and higher interest rates.

As a result, investors who are considering upgrades to their existing properties in 2023 need to speak with an expert if they plan to navigate the current landscape.

The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap

Carlos Azucena