CONTRIBUTORS
Richard Byrne
President,
Benefit Street Partners
Despite economic uncertainties and shifting market dynamics, key sectors within commercial real estate (CRE) continue to demonstrate resilience and growth. Industrial properties remain in high demand due to the ongoing e-commerce boom and reshoring trends, while the hospitality sector is experiencing a strong recovery driven by surging leisure travel. Meanwhile, open-air retail centers in strong markets have maintained stability, benefiting from high occupancy rates and limited new supply. These trends present attractive opportunities for investors looking to capitalize on durable and evolving market fundamentals.
Industrial sector: Growth driven by structural trends
The industrial sector of the CRE market is experiencing strong growth, driven by key structural trends. The rise e-commerce has significantly increased the demand for distribution centers and warehouses, particularly near major transportation hubs. This trend persists as online shopping continues to expand, making industrial properties increasingly attractive.
Key growth drivers
- E-commerce expansion: The continued rise of e-commerce fuels sustained demand for logistics and warehousing facilities, a trend expected to accelerate as consumer shopping habits evolve.
- Reshoring and supply chain optimization: Companies are increasingly reshoring manufacturing and production to domestic locations to reduce supply chain disruptions and improve efficiency. This shift is driving long-term demand for industrial properties in key manufacturing regions.
- Strategic locations: Industrial properties near major ports, airports, and highways, are in high demand due to their logistical advantages and critical role in supply chain operations.
Investment strategies
- Target high-quality assets: Focus on well-located, high-quality industrial properties with strong tenant demand to ensure long-term value and stability.
- Optimize financing structures: Secure favorable loan terms with flexible repayment options and competitive rates to enhance investment appeal.
- Implement proactive asset management: Regular maintenance, modernization and tenant-focused improvements can maximize property value and retention.
Record-setting: 22.7% of 2024 total US retail sales were online1
Hospitality sector: Sustained demand in leisure travel
The hospitality sector, particularly the leisure travel, has experienced a strong rebound. Record-setting occupancy and revenue per available room in popular travel destinations signal sustained demand for vacation and leisure accommodations. This growth is expected to continue, fueled by pent-up demand and a shift in consumer spending toward experiences over goods.
Key growth drivers
- Surging leisure travel: Transportation Security Administration (TSA) checkpoint levels returned to 2019 figures in 2022 and rose another 16.6% in 2023, reaching an all-time high. This momentum is expected to persist as travelers seek to make up for missed experiences.
- Diverse investment opportunities: The hospitality sector offers a range of opportunities, from luxury resorts to budget-friendly accommodations, allowing investors to tailor their strategies to specific market segments.
- Prime locations: Properties in high-demand leisure destinations—such as coastal regions, mountain resorts, and tourist hotspots—benefit from consistent occupancy and strong consumer interest.
Investment strategies
- Capitalize on leisure travel demand: Focus on properties in established and emerging leisure destinations where demand remains robust.
- Prioritize strong credit tenants: Investing in properties with well-known hotel operators may provide income stability and lower financial risk.
- Enhance asset performance: Implement proactive management strategies, including targeted marketing, customer experience improvements, and operational efficiencies, in an effort to maximize profitability.
Record-setting: $97.97 2023 US Hotel revenue per available room2
Retail sector: Strong markets and limited supply
The retail sector—particularly open-air retail centers in strong markets—has remained resilient despite the rise of e-commerce. These properties continue to maintain high occupancy rates and strong tenant demand. Limited new construction has further supported rental stability, making retail assets attractive to investors.
Key growth drivers
- Stable occupancy rates: Open-air retail centers in strong markets have sustained high occupancy levels, reflecting a reliable and diverse tenant base.
- Limited new supply: A slowdown in new retail development has helped preserve occupancy and rental rates by reducing competition ensuring a stable market environment.
- Strong tenant demand: Properties with a mix of essential and discretionary retailers continue to perform well, benefiting from consistent consumer foot traffic and stable rental income.
Investment strategies
- Target high-quality assets: Focus on well-located retail properties in strong markets with stable tenant bases and high consumer engagement.
- Prioritize strong credit tenants: Investing in properties leased to national chains and essential retailers may enhance income stability and reduce risk.
- Implement Proactive Management: Regular maintenance, tenant engagement, and strategic leasing initiatives may maximize property value and long-term performance.
US retail under-supplied by 200M Sq. Ft. as a result of slowed development and steady demand3
Conclusion
The industrial, hospitality, and retail sectors have proven their resilience amid evolving market conditions, each driven by unique demand drivers and structural advantages. Industrial properties continue to benefit from e-commerce expansion and reshoring, while the hospitality sector thrives on the resurgence of leisure travel. Meanwhile, open-air retail centers in strong markets maintain stability due to high tenant demand and limited new development. For investors, focusing on high-quality assets, securing strong credit tenants, and implementing proactive management strategies will be key to maximizing long-term value in these thriving CRE sectors.
While this paper focuses on these resilient sectors, multifamily remains our preferred sector, offering strong fundamentals and continued demand. Conversely, the office continues to face significant headwinds, making it a less attractive investment.
Conclusion
The industrial, hospitality, and retail sectors have proven their resilience amid evolving market conditions, each driven by unique demand drivers and structural advantages. Industrial properties continue to benefit from e-commerce expansion and reshoring, while the hospitality sector thrives on the resurgence of leisure travel. Meanwhile, open-air retail centers in strong markets maintain stability due to high tenant demand and limited new development. For investors, focusing on high-quality assets, securing strong credit tenants, and implementing proactive management strategies will be key to maximizing long-term value in these thriving CRE sectors.
While this paper focuses on these resilient sectors, multifamily remains our preferred sector, offering strong fundamentals and continued demand. Conversely, the office continues to face significant headwinds, making it a less attractive investment. For a deeper dive into these sectors, see our whitepapers on Multifamily and Office
Endnotes
- Source: US Department of Commerce.
- Source: CoStar.
- Source: CBRE Research, 2024.
WHAT ARE THE RISKS?
Past performance does not guarantee future results. All investments involve risks, including possible loss of principal.
Risks of investing in real estate investments include but are not limited to fluctuations in lease occupancy rates and operating expenses, variations in rental schedules, which in turn may be adversely affected by local, state, national or international economic conditions. Such conditions may be impacted by the supply and demand for real estate properties, zoning laws, rent control laws, real property taxes, the availability and costs of financing, and environmental laws. Furthermore, investments in real estate are also impacted by market disruptions caused by regional concerns, political upheaval, sovereign debt crises, and uninsured losses (generally from catastrophic events such as earthquakes, floods and wars). Investments in real estate related securities, such as asset-backed or mortgage-backed securities are subject to prepayment and extension risks.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Equity securities are subject to price fluctuation and possible loss of principal.
An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price.
Diversification does not guarantee a profit or protect against a loss.