Commercial real estate looks to be on the leading edge of revitalization according to comments made by Lawrence Yun, the Chief Economist for the National Association of Realtors (NAR), during the 2023 NTX Realtor Experience conference in Anaheim, California.
"There's tremendous difficulty in the commercial real estate market with higher interest rates," Yun explained. "Given roughly $3 trillion in commercial real estate loans, roughly $600 billion will come due for refinancing each year and at higher interest rates."
Yun explained that high interest rates are hindering borrowing and making refinancing costly. He also said the Federal Reserve's rate hikes have hurt small-sized banks.
"The small-sized banks – community and local banks – have much larger exposure to commercial real estate," said Yun. "So, if commercial real estate is wobbly, it's not going to hurt the big banks as much as the community banks."
Referencing changes in commercial loan standards, which has made lending tighter than ever, Yun suggested the government’s large budget deficit is also putting pressure on the Federal Reserve to continue raising rates, possibly at their next meeting mid-December.
"Commercial real estate transactions activity has been cut in half in two years. The condition for real estate deals is difficult. They simply don't want to sell at a lower price, so commercial deals are not happening, because sellers don't want to lower the price, and buyers aren't jumping in due to higher lending costs," Yun said.
He also explained that commercial property prices are falling below pre-Covid-19 pandemic levels and are set to decline further.
"The 10-year Treasury Yield is currently at 4.5%," added Yun. "Most buildings now are still overpriced in commercial real estate. Property owners have to readjust. Maybe it's better to get the deal done today rather than waiting until the future, when property values may be even lower."
Yun explained that rent growth is the strongest in the industrial space and weakest in the office space.
"In terms of actual usage of office space, the utilization is simply not there," Yun said. "Office net absorption is negative, so office space will see more rises in the official vacancy rate."
Rent growth is the strongest in the industrial field and weakest for offices, according to Yun. The office leasing net is negative, and retail leasing is also fizzling out. Even warehouse and industrial space leasing is low.
"By an objective measure, the economy is strong," said Yun. "GDP growth is at 4.9%, but there are some worrying signs for the economy. First, businesses are not borrowing, because they're cutting back on spending. Second, good inventory—or products produced—is increasing, but goods are not being purchased. Thus, there's concern for future GDP."
Yun said unemployment rates are the highest in nearly two years and wage growth is the weakest it has been in two and a half years.
"Overall, commercial real estate will revitalize, with the exception of office space," Yun concluded.