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2H 2023 in Commercial Real Estate, Part One: Housing

Here is what you really need to know about US Commercial Real Estate in the second half of 2023. Part One will start with CRE for housing (multi-family and mixed-use). Part Two will take a look at what we can expect in non-housing CRE in 2H 2023. In each case, a single regional profile is included, presenting areas where CRE of one or many types is expected to boom this year.

2023 in commercial real estate part 1 housing

CRE in Housing

Quick Facts on the Multifamily Housing Market

  • The US multifamily sector as a whole is projected to perform “above average” in 2023 despite economic headwinds and ongoing capital market disruptions. Strong housing fundamentals should keep US average occupancy rates generally above 95% and drive 4% annual rent growth.
  • Elevated construction completions are expected to push apartment vacancy up slightly in 2023, but the rate, again, is expected to remain below the 20-year average of 5%.
  • CBRE forecasts average apartment rent in 2023 increasing by ~ 4%. Cap rates for multifamily properties increased by ~ 75 to 100 bps in 2022, and CBRE anticipates additional increases in 2023.
  • With the for-sale market already supply-constrained, it is projected that nearly 5 million new US market-rate multifamily units will be needed in the US by 2035 to keep pace with demand. In the near term, however, as households grapple with the remnants of economic uncertainty, new renter demand may struggle to keep pace with supply.

Quick Facts on Mixed-Use CRE

Mixed Use is Hot

  • Mixed-Use CRE has now become a central piece of urban development planning. Developers should continue to expect added value in combining residential, commercial, cultural, institutional, and even entertainment functions, in order to create a fully blended mixed-use setting.
  • Complementary business entities can also be disconnected and co-exist on the same parcel of land. As such, CRE development in the mixed-use sector can focus on a single building or span an entire city block or neighborhood. Developers can create a theme within a mixed-use structure, in which all residents and business owners share an everyday lifestyle, economic status, or cultural vision.
  • Importantly, as the services and benefits of a mixed-use building become ingrained in a neighborhood, mixed-use property for sale becomes more valuable and creates a more efficient ecosystem among all inhabitants.

Mixed-Use Variations

  • Some analysts describe as many as 7 different modalities for mixed-use CRE, of which the most common are: the historic “main street” model, live-work, industrial/neglected area retrofit, and innovative hospitality models.
  • Other analysts describe the options more simply as horizontal (multiple single-use buildings in a single development), vertical (mixed-use in one building, varying by floor), and walkable (a combination of horizontal and vertical, all clustered around amenities like parks, etc.)

Market Drivers in Mixed-Use

Some analysts speculate that there are four main reasons for the enhanced interest in mixed-use properties:

  • Less risky investment: Mixed-use real estate investors and developers can mitigate risk due to the high demand and diversity of space. Tenant retention tends to be higher in mixed-use CRE and live-work CRE tends to benefit from increased tenant loyalty and appreciation of amenities. Typically, a property owner who rents a stand-alone retail store or building risks a substantial decrease in revenue should they lose a tenant. Mixed-use properties, however, offer a buffer because the loss of one tenant minimally impacts revenue, and tenant types can be easily interchanged.
  • Effective land use: Investors and cities are able to more efficiently utilize land to deliver environments that infuse new life into communities by integrating a variety of different uses into one product.
  • Less competition: When mixed-use CRE is located in the “right” neighborhood, the property takes on gem-like characteristics. This is especially noted in secondary and tertiary markets.
  • Captive (and appreciative) client base: Local businesses thrive on proximity to their client base, so what’s better than sharing a building full of prospective customers? Today’s generation values convenience, and they’ll even bypass online marketplaces for the brick-and-mortar stores they walk by every day. In this way, mixed-use CRE is a much-needed social counterpoint to the distancing and isolation resulting from the proliferation of online options.
  • Portfolio diversification: Mixed-use developments also provide much-needed diversification, which provides balance to an investor’s portfolio and offers downside protection. Because these properties incorporate a variety of uses and tenants, investors and developers can protect themselves against large vacancies compared to single-use products. Further, by incorporating a variety of uses, owners can strategically roll tenants and steadily increase rents, resulting in strong long-term NOI.
  • Diversity of tenants>: For property owners and property management companies, a mixed-use apartment building can efficiently address the diverse needs of both residents and business owners.
  • Convenience: According to a recent Community and Transportation Preference Survey by the National Association of Realtors, 53% of Americans prefer walkable communities, while residents and business owners desire easy access to schools, libraries, parks, and other facilities.

    Today, consumer preference for urban-lifestyle centers that offer the ability to live, work, shop, and play all in the same place is coming from all demographic groups. Over 60% of millennials and about 50% of Gen Xers, baby boomers, and the silent generation want to live in walkable communities.

  • Demographic appeal: Mixed-use CRE has exhibited strong appeal to millennials and empty-nester baby boomers – both classes increasingly opt for:
    • Social living in urban centers;
    • Affordable rentals – more manageable than single-family housing;
    • The proximity of shopping, parks, recreation, and entertainment facilities; and
    • CRE that exhibits sustainability and smart, green technology.

Sample Regional Outlook: San Diego Multifamily

San Diego

  • Overall, the San Diego region is projected to have an annual population growth of > 9% over the next 10 years. The region is one of the fastest growing areas in the US and, as of Q4 2022, was the 8th most populous US area.
  • As of 2022, San Diego County has 69 million residents, whereas the City of San Diego has 1.4 million residents, a diverse population, the nation’s largest military community, and a talented workforce.
  • A geographically constrained market continues to limit supply while the current $885,000 median home price (sold price) fuels demand for apartments.
  • Data differs widely on new unit construction and absorption in San Diego in 2022: one study suggests 4,010 units in 2022 with ~ 500 absorption; other analysts claim ~ 5,700 2022 units and unit absorption of ~ 2,000 units.


  • While the occupancy rate in stabilized assets dropped 30 basis points from Q3 2021 to Q3 2022, it remained high, at 97.6% as of August 2022. This despite the fact that a reported 2,472 units came online during the first three quarters of 2022 – although not remotely enough to solve the serious housing crisis in San Diego County.
  • Some analysts suggest that ~ half of San Diego’s housing supply are rental units and less than 1% are typically vacant.
  • However, analysts differ significantly on the vacancy number and the majority say that, in Q4 2022, the vacancy rate in San Diego County was actually ~ 3.44% (and 2.4% in Q3). Despite the disparity in reporting, these are uniformly positive numbers.


  • San Diego apartment rents have recorded rapid gains in recent periods although the pace of growth slowed in Q2 2022. In Q3 2022, “asking rents” increased by 2.2% to $2,275 per month. “Asking rents” also are reported to have spiked by an average 15% YoY in 2022 2021. However, the increase differs by unit type (2BR +7%, 3BR +12%, 4BR +16%).
  • Kidder Matthews Q4 2022 MF Report states that average San Diego rents in 2022 were: studio ($1,659), 1BR ($1,950), 2BR ($2,385), and 3BR ($2,655).
  • Most analysts agree that, on a YoY basis for 2022 over 2021, San Diego rents overall were up 14.5%, far outpacing the 9.4% national average figure. But the statistic also differs by MF specs – e.g., Q4 2022, Zumper said the one-bedroom price in San Diego was up 21.4% over the past year but other, and perhaps more defendable, studies point to a 1BR YoY rent growth of ~ 18%.
  • One thing fueling rent increases may be growing competition by huge P/E investors (Blackstone, e.g.) that have been very active in buying San Diego properties the past two years, and then (reportedly) rapidly increasing rents.
  • The Blackstone Tenants Union just released a report [March 25, 2023] called “Blackstone Comes to Collect: How America’s Largest Landlord and Wall Street’s Highest Paid CEO are Jacking Up Rents and Ramping Up Evictions.” The report highlights San Diego County, where Blackstone purchased thousands of affordable housing units in 2021. As renters moved out, the company raised rents in some units between 43%-64% in two years.
  • USC Lusk’s Q4 2022 annual Casden Real Estate Economics Forecast projects “continuing rent increases over the next two years” across the five Southern California housing markets it tracks — Los Angeles County, Orange County, the Inland Empire, Ventura County and San Diego County.
  • Average sales price per unit in San Diego in 2022 was $400,000, and the average cap rate for 2022 MF was ~ 4.2%. The gross rent multiplier on units sold in 2022 was about 17.6 times.

What’s Hot in 2023

CRE analysts have noted some pronounced changes in buyer goals for MF units in 2023. Several of these are noted below:

Bringing the Indoors Out

By combining indoor and outdoor living spaces, developers will be able to increase the perceived size of a home’s footprint while promoting a resident’s physical and mental well-being, both of which are selling points in the eyes of today’s buyers.

This group is taking everything outside. They want a space for al fresco dining and watching TV, plus an open-air office with Wi-Fi capabilities and Zoom-friendly backgrounds. Because of that, there will be a more critical eye on ensuring outdoor spaces have sufficient shade structures and protection from the elements, lighting at night, heating features for cooler months and thoughtfully placed outlets near seating and work areas as we adapt outdoor spaces to be usable year-round for multiple functions.

Cozy Color Comeback

Many higher-end multi-family units also are infusing more warmth into finish packages, mixing subtle tones with rich neutrals for style and drama that creates a backdrop for buyers’ individual aesthetics.

Shape-Shifting Spaces

Chameleon-like spaces that serve multiple functions throughout the day are in high demand at multi-family properties, e.g. “modified” open floor plans that include a bonus area where residents can focus on specific tasks while still being connected to the rest of the home.

Fusion Solution

A fast-growing form of hybrid design places condos and apartments in separate buildings, with owners given access to amenities in both buildings and lessees also being able to access many owner privileges like virtual concierges, shopping reservations, fitness centers and other hospitality privileges.

Second-Home Surge

Meanwhile, interest in second homes has surged:

‘Fueled in large part by work-from-home capabilities, the second-home market skyrocketed in 2020 and we don’t see activity slowing anytime soon,’ said David Wolf, president and CEO of Wolf Development Strategies, a premier full-service development advisory, marketing and sales firm for residential developments. In fact, some buyers are contemplating not just second-, but also third-home purchases. ’

In these cases, buyers want homes that offer very different activities and experiences from each other – if one residence has access to the beach, then another may be near the mountains. ‘We’re not even calling them vacation homes anymore, as most people are still working or e-learning; they’re just doing it in different surroundings,’ he added. ‘And because the demand for secondary homes increased so quickly, existing inventory is pretty low.’

Walkability Wins

Walkability is coveted and will be even more of a priority going forward. As more and more people return to workplaces and classrooms, the expectation is a walkable commute will have more appeal than riding public transit or sitting in traffic. In many cases, today’s tenant wants to be a 15-minute walk from work and essential businesses like grocery stores, pharmacies, and restaurants. This is a change from previous years when a 15-minute ride was acceptable.

Further Information and Detail is Readily Available

When you’re ready for added advice, consultation, and assistance with your CRE Housing plans, feel free to contact us – we’re standing by to help.

Lee is a Principal Consultant at Cayenne Consulting. Lee brings to Cayenne clients over 30 years of experience from his prior roles as a law partner in entertainment law, securities licensee, real estate broker, and multiple positions as a CEO/COO of early-stage media companies. Lee received his JD from the UCLA School of Law. View details.

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