Seven Commercial Real Estate Investment Strategies for 2023

With the year starting out amid uncertainty and no small amount of pessimism, there are certain strategies that promise to play well amid the environment. Read on to find out what will work in 2023.

1. Sell Industrial Assets In Overpriced Markets

Industrial assets in some of the "hot" markets like the Inland Empire, Orange County, Miami, Phoenix, San Francisco and San Jose, during the last few years, have seen rents increase at least 50% and cap rates compress to 3.0%-4.0%. With supply chains back to normal and less demand for products due to raging inflation, rents may decline in these markets by 20% or more. Industrial assets in these markets should be sold and the proceeds reinvested in more stable and value-priced industrial markets in the Midwest, Texas, Tennessee, and the Carolinas.

2. Sell Net Lease Properties

The net lease industry has been very robust during the last few years courtesy of the Fed's zero interest rate policy and abundance of capital. However, with the Federal Funds rate at 4.25% and increasing to 5.0% or more by the first quarter of 2023, net lease assets will decline in value substantially as cap rates increase. The net lease investment business is really a bond spread game, by buying long-term leases at cap rates of 6.0%-8.0% and financing these assets at mortgage rates of 5.0%-7.0%. These investments tend to have long durations of twelve to fifteen years, which may cause large price decreases when rates rise. As with corporate bonds, when rates rise, the value of the net lease assets falls.