Bracing For Change and More Uncertainty

To say the commercial real estate market is not facing challenges is an understatement, but it’s also looking at opportunities, according to LightBox’s findings and analysis in its “2023 Mid-Year Sentiment Report.” Based on its industry outreach in the period from April through the end of May 2023, participants acknowledged that the market continues to change because of major outside influences from technology, climate risk and economic currents, so those who are most flexible and nimble may fare the best.

Overall, the first half of the year reflected widespread uncertainty due to three additional increases in interest rates—on top of seven last year, all of which have stalled CRE investment and related activity in lending, but also valuation and environmental due diligence work. Altogether, the Federal Reserve has raised rates 10 times since March 2022 for an average hike of 50 basis points (BPs). This type of huge wallop is something the market hadn’t experienced in 15 to 20 years, LightBox reported. Moreover, more hikes are possible since Fed Chair Jerome Powell said there may be two more quarter percentage point hikes before year-end if inflation remains above his organization’s target. Such changes coming fast and on top of others makes it tough to plan and adds to uncertainty and concern.

CRE industry participants also face the possibility of a recession, plus subdued capital flows, obstacles to transact deals and fluctuating property valuations. To top these off on the longer-range horizon over the next two years is a wave of billions in CRE loan maturities, which will require refinancings, especially in the office and retail sectors.

At the same time, how the industry is affected varies in its different sectors with industrial and multifamily faring better—for now. Because of how healthcare delivery has changed–in part due to the pandemic and in part because of technology, reimbursements and more, real estate in that sector has been changing to meet various needs.

Offices are also in the throes of square-foot adjustments. How much space is needed and where is in flux as companies change–and sometimes change again–their return-to-office policies. Many want staff to return but don’t draw a line in the sand and instead make it a strong request. That makes it tough for developers, owners and managers to know what footprints work best both physically and financially.

The retail sector is also changing, though that’s been occurring even before the pandemic with experiential shopping replacing huge stores in football-size malls. On the bright side, many e-commerce firms are opening brick-and mortar storefronts to compete for those who want to get away from their computers to buy, touch merchandise and be around others doing the same.

Will sentiment calm and offer a sense of stability? Probably not over the next six months, the survey found, since most respondents expect more of the same and have growing concerns about the economy and a possible recession occurring before year-end. At the same time, few respondents said they plan to lay off staff. In other words, any downturn coming is likely to be only short-lived.

What causes more concern is climate and specifically how floods and wildfires may affect their properties if located in certain risk-prone areas. As a result, 37% of consultants said clients have become more demanding about doing environmental due diligence. Others want tighter underwriting because of bank failures. And still others have concerns about pricing, and the disparity between what buyers and sellers each expect, with the upshot that transactions get put on hold. A level of acceptance about current values—or perhaps a big dose of reality–will help to move transactions forward, said Adam Bennett, Senior Vice President, AEI Consultants.