Commercial real estate thrives despite challenges, telling a story of resilience and adaptability
Forecasts for commercial real estate for the second half of the year remain broadly positive, with multifamily, retail and industrial properties continuing to perform well.
But potential roadblocks loom: High interest rates are expected to persist and office vacancy rates continue to rise, according to a May 6 report from JPMorgan Chase.
“On the revenue side, factors such as rents and vacancy rates are likely to remain flat to stable for most property types, with the exception of office,” said Victor Calanog, global head of research and strategy for Manulife Investment Management's real estate private markets group. “On the pricing side, we expect it to be a breakthrough year in terms of price discovery. We forecast deal activity, loan issuance and CMBS.” [commercial mortgage-backed securities] Issuance is expected to increase by 25-30% compared to the 2023 low.”
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According to Moody's Analytics CRE, the national office vacancy rate will reach 19.6% in the fourth quarter of 2023, breaking the previous record of 19.3%. Calanog said the most attractive office properties in the best locations are likely to outperform the rest of the market, a trend that is likely to continue for the next few years, meaning commercial real estate investors need to evaluate the risks and opportunities of each asset and deal.
Despite an oversupply of apartments, multifamily housing remains strong because there is persistent demand for affordable and workforce housing. Vacancy rates for Class B and C properties were 4.6% last year, and 6.5% for luxury properties, according to Moody's. As a result, some property managers are backing down.
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Neighborhood shopping centers with grocery stores anchored in densely populated areas are the stars of retail, and many big box stores are capitalizing on the trend by opening smaller stores.
“Downsizing of concept stores is an important part of the evolution of retail,” Calanog said. “The best-performing retail properties will have owners and operators who are able to flexibly accommodate the needs of their most important tenants.”
The story continues
Demand for industrial real estate is on the rise as e-commerce sales grow to 15.6% of total retail sales. Nearshoring and the need to replace outdated industrial buildings are likely to drive construction and demand beyond the second half of the year.
Still, the upcoming presidential election and a deadlocked Congress could affect consumer confidence and spending, leading to higher interest rates. The ongoing wars in Ukraine and the Middle East could also destabilize markets and affect global supply chains.
But Calanog remains optimistic.
“As long as domestic and global economic growth remains on track, there is no reason to revise our forecasts downwards at this time,” he said.
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This article, “Commercial Real Estate Thrives Despite Challenges, Tells a Story of Resilience and Adaptability,” originally appeared on Benzinga.com.
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