​Expert: CRE is Not Facing a Massive Reset

Many have been forming negative perceptions about commercial real estate as the media is steering its focus on a looming recession, rising interest rates, and waves of CRE distress. Noise is drowning out the real number, according to John Chang, Senior Vice President, Research Services, Marcus & Millichap.

Chang addressed the issue during a recent video, “Examining the CRE Perception Gap” produced by his firm.

“Media is offering a broad-based perspective that the economy and CRE are facing a reset,” Chang said. “But when you look at the numbers, it’s a very different story.

“It’s shifting from an exceptional growth period to a more normal operating climate – that’s not a massive reset,” he said.

“We’ve been hearing that [doom and gloom] story for a while now, but it hasn’t shown up yet. Investors should remain vigilant.”

It’s not that there aren’t headwinds, Chang said. “Office is disrupted,” he said. “There are challenges in asset prices are recalibrating, the cost of financing is up.”

Last year, however, the GDP grew by 2.1% last year and by 1.1% so far in 2023. That aligns with the forecast of 1.2% for the year. The economy is forecast to grow in 2023 and 2024 – the forecast is positive, Chang said.

The US has added jobs for 27 consecutive months. There are more now than pre-pandemic. In Q1, 1 million jobs were added. While the media focuses on layoffs, first-time unemployment claims are typical.

Chang said that recessions generally are preceded by a 50 bps rise in unemployment in the months before the recession, “and we just haven’t seen that yet,” he said. “The labor market is strong and is not signaling an imminent recession.”

The 10-year US Treasury rate has been holding in the 3.5% range for months.

“This is a low-interest rate, even though we’ve been used to lower rates in recent years,” Chang said. “So, if you just look at the numbers, the economy is actually doing pretty well.”

He said the same is true for CRE. When one compares how it’s performing now to the five-year pre-pandemic average, only office has weakened.

The vacancy rate for apartments was 5% then, and it’s 5.2% now and has shown 6.4% rent growth, outpacing the pre-pandemic numbers.

Multi-tenant retail has improved. It had a 5.9% vacancy rate before with 2.7% rent growth, and now it’s 5.6% with 5.5% rent growth.

Industrial was at 4.9 vacancy, and now it’s 4% with YoY rent growth in Q1 up by 16.6% after experiencing 5.8 rent growth in the five years prior.

Office vacancy in Q1 2023 was 16.8 percent vs. 13.1%, and it had a 3.1% rent growth before compared to just a 0.7% increase in the past year.