Commercial Forecast Good or Bad? It Depends
NAR: Commercial performance will vary from metro to metro, and tighter lending now adds a new challenge. But net absorption has been mostly positive nationwide.
WASHINGTON – According to National Association of Realtors® (NAR) Chief Economist Lawrence Yun, the challenges facing commercial real estate are brought on by tighter lending policies among many small and regional banks, which have been a key source of commercial loans.
Still, due to continuing U.S. job gains, net absorption has been mostly positive nationwide, Yun said during the 2023 Realtors Legislative Meetings in Washington, D.C.. The apartment, industrial and retail sectors are helping to keep the overall industry relatively stable.
“The performance of commercial real estate markets will vary across the country,” Yun projected during Tuesday’s Commercial Economic Issues and Trends Forum. “Markets with strong job gains will naturally hold on much better, while those with weaker job conditions will struggle to raise net occupancy.”
America’s apartment sector recorded 116,000 net positive absorptions in the past year, while the industrial and retail sectors added 361 million square feet and 64 million square feet, respectively, over the last 12 months. Office markets, however, saw a reduction in net absorption by 29 million square feet over the same period.
“The national office market will continue to see rises in vacancy rates due to falling demand,” Yun said, and the “apartment sector will record a modest uptick in vacancy due to robust new supply.”
While a lot of NAR’s focus during the legislative meetings centered on higher mortgage interest rates, Yun addressed the implications of Fed decisions on U.S. commercial markets.
“The Federal Reserve’s aggressive rate hikes have damaged balance sheets for regional and local banks, an important source of commercial real estate loans,” he said. He estimated that continual rate rises will, in part, cause commercial real estate transaction volume to decline by 27% overall in 2023.
“The lack of capital, higher costs of financing and refinancing, and the weakening economy will contribute to a lower overall valuation of commercial real estate prices,” Yun said. “Weaker prices will mean opportunities for those with deeper pockets to get deals done in the months and years ahead.”
According to Yun, appraisal values have fallen by an average of 15% from peaks in early 2022.
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