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Commercial Real Estate Expected to Revitalize

According to NAR Chief Economist Lawrence Yun, commercial property rates, with the exception of office space, are expected to stabilize, and the commercial real estate market will see a revival. Yun discussed these economic trends and issues affecting the industry at the 2023 NAR NXT, The Realtor® Experience in Anaheim, California.

Challenges in Commercial Real Estate

Yun highlighted the difficulty in the commercial real estate market, with high interest rates hindering borrowing and making refinancing costly. Roughly $600 billion in commercial real estate loans will come due for refinancing each year at higher interest rates. He also mentioned that the Federal Reserve’s rate hikes have negatively impacted small-sized banks, which have a larger exposure to commercial real estate compared to big banks.

Declining Commercial Property Prices

Yun explained that commercial property prices are falling below pre-Covid-19 pandemic levels and are set to decline further. He suggested that property owners should consider adjusting their expectations and get deals done today rather than waiting for the future when property values may be even lower. Rent growth is strongest in the industrial space and weakest in the office space.

Office Vacancy Rates on the Rise

The office vacancy rate is rising and is expected to continue to increase. Big cities such as San Francisco, New York City, and Los Angeles are seeing the highest rise in office vacancy rates. Yun stated that businesses are not borrowing due to cutting back on spending, and good inventory is increasing without being purchased, leading to concerns for future GDP.

2024 Economic Outlook

Yun believes that the 2024 economic outlook depends on the Federal Reserve’s policy. He called for the Federal Reserve to consider cutting interest rates in early 2024 to halt the ongoing weakness and start a revival in the commercial real estate market. Yun shared that community banks would benefit from interest rate cuts, and GDP growth would contribute to net leasing and investment sales.

In conclusion, Yun expressed optimism for the revitalization of the commercial real estate market, with the exception of office space.

About the National Association of Realtors®

The National Association of Realtors® is America’s largest trade association, representing more than 1.5 million members involved in all aspects of the residential and commercial real estate industries. The term Realtor® is a registered collective membership mark that identifies a real estate professional who is a member of the National Association of Realtors® and subscribes to its strict Code of Ethics.

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