Where Smart Investors Can Find Opportunities in Commercial Real Estate

Commercial real estate once was a place that offered investors reliable returns, but the rise of both interest rates and home working, along with the impact of online commerce has affected demand for centralized workplaces and retail spaces. As a result, investors looking at commercial real estate need to adjust their approach to the market.

For example, investors thinking of shifting their strategies based on high office vacancy rates should consider regional differences. While an increase in remote and hybrid work might have made 2023 a difficult year for offices in the US, where vacancy rates hit a record 13.7%, in Seoul, where occupancy rates hover at 98%, rents have risen 15% year-on-year. As Korea is considering a digital nomad visa that would make it easier for foreigners to work in the country, the market could soon become even more competitive.

In order to distinguish the signal from the noise, it is important for real estate investors to alter how they think about the market. Recent shifts in how and where people live, work and consume have changed the way real estate is used, and even created new sectors, resulting in opportunities for investors—providing they update their perspective on real estate.

Traditionally, real estate investment segments have been divided into four categories: residential, industrial, office and retail. But viewing the market through this lens limits investors, as these generalized real estate categories fail to consider how nuanced this asset class has become.

Invesco Real Estate has developed an alternative framework that provides context and insight into what drives today’s property values. Rather than rely on traditional categories—which can be rigid and outdated—Invesco characterizes segments based on how people consume, live, innovate and connect.

Mike Bessell, European and Global Strategist at Invesco Real Estate, says that this framework examines the fundamental demand drivers that are changing the ways people are using buildings.

It also helps investors better understand the intricacies that exist within traditional sectors, such as hotels, which are traditionally viewed as a single asset class, regardless of function. When viewed through the “consume, live, innovate and connect” prism, a business-centered hotel, where the primary function is to network, or connect, is seen as distinct from a luxury vacation resort where people spend their leisure time.

This refined approach helps Invesco’s global team of 600 real estate experts identify investment opportunities—such as data centers, distribution facilities and medical offices—based on new realities like aging populations, the rise of e-commerce, the shift to hybrid and remote working and the explosion of data-intensive emerging digital technologies.

Real estate is the oldest asset class, and is as relevant today as ever.

To uncover new opportunities, it is critical to look beyond the “what,” and instead really dig into the “how” and the “why.” How are long-term trends, like changing demographics, urbanization, climate change and the advance of technology, driving behavior? How is that behavior playing out in the world of real estate?

Even in sectors that have been written off as “in decline,” there are exciting opportunities to be found. Investors just need to take the right approach. As ever, it’s about finding the right configuration of location, great amenities, and sustainability.

Bessell also points out that higher interest rates have created some compelling opportunities.

“The recent capital market disruption is throwing out some very attractively-priced opportunities to invest in high-quality real estate which meets our long term convictions,” he says.