In a compelling presentation at the 2023 NAR NXT Commercial Economic Issues and Trends Forum, National Association of Realtors (NAR) Chief Economist Lawrence Yun suggested the commercial real estate sector is poised to reinvigorate and called on the Federal Reserve to consider a key step: lowering interest rates.
Yoon highlighted the daunting challenges facing the commercial real estate market, particularly the impact of high interest rates: There are roughly $3 trillion in commercial real estate loans outstanding, and the equivalent of $600 billion is earmarked for refinancing each year at high interest rates, discouraging borrowing and increasing refinancing costs.
“High interest rates pose a major obstacle, especially for smaller banks with significant exposure to commercial real estate. Instability in this sector is felt more acutely by regional and local banks than larger banks,” Yoon explained.
Commercial Real Estate Market Trends and Developments
Yoon highlighted a significant decline in commercial real estate transaction activity over the past two years, attributing this to sellers' reluctance to lower prices and rising financing costs having a deterrent effect on potential buyers. With commercial property prices below pre-COVID levels, Yoon suggested property owners may need to recalibrate their expectations.
Notably, Yoon found that rent growth varies by sector, with industrial space experiencing the strongest growth and office space experiencing the weakest growth. Office vacancy rates are on the rise, especially in major cities such as San Francisco, New York and Los Angeles.
Economic Concerns and Outlook
Yoon expressed concern about the economy despite a strong 4.9% GDP growth rate. Businesses are cutting spending, and inventories are building without a proportionate increase in purchases. The unemployment rate is at a nearly two-year high and wage growth is at a two-and-a-half-year low.
“The Fed is raising interest rates to contain inflation, but will it destroy the economy?” Yoon asked, pointing to slowing monthly job gains and concerns about future GDP.
Looking ahead: The role of the Federal Reserve
Yoon argued that the economic outlook for 2024 hinges on Federal Reserve policy, suggesting that a more stable inflation picture could provide a basis for considering interest rate cuts early next year, halting the current weakness and potentially leading to a commercial real estate revival.
Yoon said the interest rate cuts could help recapitalize regional banks, stimulate GDP growth and increase net lease and investment sales, signaling a revitalization of the overall commercial real estate sector, excluding office space.