Investors still need to be cautious about over-borrowing to fund commercial real estate investments, according to Anthony Graziano, CEO of Integra Realty Resources.

Investors racked up debt in the first half of the year to fund real estate investments, a practice that is not sustainable for the long term, Graziano said in an interview. IRR, based in Denver, consults on commercial real, including multifamily, office, retail and industrial properties, in the U.S. and the Caribbean Islands.

“Focusing on the fundamentals of the commercial real estate market, we remain optimistic because the economy is moving in the right direction,” Graziano said. The retail real estate sector in particular “is rebounding strongly from Covid-19, buoyed by continued discretionary consumer spending."

However, “consumer debt sky-rocketed in the first half of 2023, which should be a cautionary marker as we head into continued economic uncertainty,” Graziano added. “Investors will be rewarded by understanding their tenant mix, tenant market position, and local demand dynamics as consumer spending shifts into lower gear.”

Investors should be cautious about over-leveraging themselves, he said. It has gotten more difficult to borrow, “so investors should be conservative, particularly as the economy continues to be uncertain. We thought interest rates might come down by the end of the year, but that is not going to happen,” he said.

Office space is one area that continues to take a hit as vacancies persist, he said, while multifamily units in some areas are stable because tenants are not moving out.

Office space is facing contradictory forces, which creates bright spots in some regions, he said. The tech and biotech sectors are behind any stability that exists in specific areas of the country, while broader economic challenges, including inflation, continue to cloud the outlook for this sector, IRR’s Mid-Year Outlook said.

Multifamily housing also is facing competing forces, the IRR study said. The national multifamily market is showing a mix of growth in key cities, but rising vacancies in others due to varied regional dynamics, IRR said. There's robust growth in Northern New Jersey, Boston, and Florida, and slowdowns in areas like Birmingham and Raleigh, the study said.

The retail sector is rebounding strongly from Covid-19, buoyed by continued discretionary consumer spending. IRR said the Western and Eastern regions of the country are leading in mixed-use developments, which reflects an innovative approach to retail spaces in land constrained markets. The Central and Southern regions, despite facing vacancies, are trying to capitalize on opportunities in adaptive reuse and redevelopment and trying to highlight a strategic focus on repurposing existing spaces.

Nationally, the industrial real estate sector continues to thrive, evidenced by increased demand for storage, distribution and logistics facilities, with regions like the Central and Southern areas in particular benefiting from retail and infrastructure growth, IRR’s study said.

At the same time, “the Eastern and Western markets are exhibiting steady and varied growth respectively, influenced by economic factors and city-specific expansions, such as in Denver and Seattle,” the firm said. “Despite economic challenges, the industrial sector's outlook remains positive, supported by persistent demand dynamics including on-shoring trends, changes to logistics capacity and supply dynamics.”

However, “industrial construction appears to be slowing, particularly on speculative development due to increasing capital market and land costs,” the study said.