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CRE’s Growth Forecast For 2022

ommercial real estate can be expected to perform well this year despite the prospect of higher interest rates, according to the National Association of Realtors.

While interest rates are expected to broadly rise by about 75 basis points, they will still be low compared to historical levels and should not cause a severe decline in investment activity and the ability of companies to service their debt.

Bottom line: CRE’s underlying demand fundamentals should more than mitigate the impact of the slightly higher interest rates in 2022, according to NAR’s 2022 Commercial Real Estate Outlook report.

Office Vacancy Rates to Tick Higher

Only the office real estate market will continue to see higher vacancy rates in 2022.  Ongoing construction is equivalent to 2.6% of the current inventory and it is expected to further raise the vacancy rate to 13.5% (12.2% in 2021) and cause a decline in office rent by 0.8% (-1% in 2021).

However, as seen in the 2021 trends, the high office vacancy rates will remain concentrated in the primary metro areas of New York, San Francisco, Chicago, Los Angeles, Washington D.C., and Boston.

Meanwhile, secondary markets with lower cost of living (home prices or rent) and lower office rents will continue to attract businesses and workers into the area.  Based on the level of under construction activity, developers/investors are bullish on secondary markets like Dallas, Austin, Atlanta, Charlotte, Nashville, Miami, and Salt Lake City.

COVID Will Drive Office Re-Entry

The timing of “the big re-entry” to the office is still dependent on the course of the COVID variants. However, it appears that the Omicron virus is not as deadly as COVID-19 with vaccinations reducing the risk of death.

Beyond the short-term effect of the re-entry on absorption, the long-term effect of the pandemic pertains to the need and use of office space (e.g., overall square footage and per employee square footage) and the allocation of office space for employees (fixed or hot desking/hoteling).

CBRE’s 2021 Occupier Survey reported that in the United States, 62% of employers expect to adopt a hybrid schedule with employees going to the office 2.5 days a week. A higher fraction of U.S occupiers expect a contraction of their office space, at 44%, compared to 29% that expect an expansion and 27% that expect no change.

Class B Office Conversions Could Draw Interest

However, the adaptive reuse of office space for other uses such as for lab science and multifamily housing could increase investor interest for office properties, especially the older properties with floor plates and design that are suitable for such conversions.

NAR’s analysis on office-to-housing conversions shows a strong potential for the conversion of Class B office units into housing in New York, Chicago, Los Angeles, and Boston but less potential in Washington D.C. and San Francisco.

Industrial Demand to Remain Robust

The demand for industrial space is expected to remain robust given that consumers have shown a preference for both online and in-store shopping.

With brick-and-mortars also providing online shopping services to complement in-store shopping, the demand for last-mile delivery services will drive the demand for warehouses and distribution centers.

About 460 million square feet of industrial space is under construction, or about 2.6% of the current inventory. NAR foresees that this construction will lead to slower industrial rent growth of 7.4% on an annual basis from the current rate of about 8.4% as of 2021 Q4 (6.7% in 2021). The vacancy rate is expected to slightly increase to 5% (4.9% in 2021).

In the retail brick-and-mortar market, growth will continue to be driven by smaller shops such as neighborhood centers, strip centers, and single-tenant stores. Given the current low vacancy rate at brick-and-mortar stores and with the rise of experiential retail that will drive foot traffic to the malls, vacancy rates are likely to decline further to 4.6%.

Higher Mortgage Rates to Boost Rental Demand

In the multifamily market, higher mortgage rates will boost rental demand as a mortgage payment becomes slightly more expensive. NAR forecasts that the vacancy rate will further tighten to 4.8% in 2022 (5.1% in 2021) and rent growth to average at 10% (7.8% in 2021).

Renters have started returning to the primary metro areas of New York, Chicago, Boston, Washington D.C., Los Angeles, and San Francisco, in part attracted by the huge rent discounts during the pandemic. However, asking rents are picking up strongly which will tend to drive renters to less expensive secondary/tertiary markets or to outlying suburbs of these primary metro areas, especially with the opportunity to work from home.

Rental demand is likely to continue to be strong in the West region and New England states where owning is more expensive than renting. Meanwhile, retiring Baby Boomers are likely to fuel demand in the Sunbelt markets, which will boost demand for commercial space (retail and small offices).

 

Source: GlobeSt.

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14 Big Factors Driving CRE Trends This Year And Beyond

The Covid-19 pandemic has created an unprecedented challenge for the real estate industry.

Commercial real estate professionals have had to navigate new obstacles like virtual showings, finding buyers during an economic downturn and perhaps most significantly, the shift away from centralized offices toward full-time remote work.

The current climate and circumstances will continue to impact real estate trends in the months and years to come, and if you’re in the industry, it’s important to be prepared for what’s ahead. To help, Forbes asked 14 members of Forbes Real Estate Council for their insights.

Below the members identified the biggest factors driving commercial real estate trends this year and beyond.

1. Utility Management For Remote Work

One factor is the ability of some companies to effectively and responsibly manage critical business initiatives while telecommuting. Companies are evaluating the health, safety and necessity of their employees working remotely versus maintaining the continuity of a central office location which may have redundant electrical power, data connectivity and other security measures necessary to maintain sales and operations. – Josh Gopan, Simone Development Companies

2. The Need For Office Space In The Home

While everyone has always needed a place to live, people’s homes now have added value. With many people shifting their workplaces from offices to their homes, their dwelling also has increased in importance. Conversely, this has had a detrimental effect on office space across the country. – Matt Picheny, MJP Property Group

3. Smart Amenities

The adoption of technology will drive smart amenities from the “nice-to-have” column to the “need-to-have” column as restrictions are put in place by local, regional and state governments. Adoption was already trending up pre-Covid-19, but should continue to see a strong increase over the next 12 to 24 months. – Marshall Friday, ADT Security Services

4. Newly Available Subleases

Large, established institutions, like Twitter, Facebook, etc. have put work from home requirements in place that are minimizing their physical space requirements. Combined with businesses negatively affected by Covid-19, there is a large volume of subleases hitting the market. Younger companies that are doing well are looking for flexible space and terms, so subleasing might be the top CRE trend. – Matt Weirich, Realync

5. Less Demand For Commercial Office Space

The outlook of office space is uncertain, but possibly very dark. Businesses had to adjust quickly to a virtual workforce. Many of those businesses will find that they can operate just as well without the overhead costs associated with owning or leasing a physical office. – Chris Bounds, reHacking / Bounds Realty Group by eXp Realty

6. Uncertainty Around Retail Business Operations

One of the key factors driving commercial real estate trends since Covid-19 is the uncertainty surrounding which type of businesses will be able to operate during the pandemic and how that drives the values of those assets. Businesses in strip malls, like nail salons and hair salons, have previously been immune from fluctuations in the economy, but are now at the peril of intermittent shutdowns. – Todd Sulzinger, Blue Elm Investments

7. Property Maintenance As A Priority

Covid-19 has pushed property maintenance to the forefront. Consumers are more concerned about disinfecting than ever, and well-maintained locations—including everything from sanitization to spotless floors and regular, visible cleaning to fresh landscaping—instill confidence. Facilities maintenance is an area companies will need to increase investment in as it becomes integral to brand experience. – Marc Shiffman, SMS Assist

8. High Demand For Essential Businesses

In the net lease world, investors are focusing on quality and stability, both for guarantor and real estate fundamentals. We’re seeing very high demand and capital being reallocated to essential businesses like grocery stores, dollar stores, auto parts and service centers, pharmacies, medical companies and quality guarantors in fast food. Stable cash flow with quality tenants paying rent wins in a high-risk market. – Kyle McCollum, Trinity Real Estate Investment Services

9. Short-Term Market Performance

Covid-19 prompted many investors to spend more time tracking short-term market performance. From an investment perspective, our strategy and analysis begins by evaluating which sectors experienced stability in the last 20 weeks. Multifamily, self-storage, healthcare, NNN retail and office performers are well-documented, however, we must consider how each asset will also perform in the long run. – Keith Lampi, Inland Private Capital Corporation

10. Increased Importance Of Rental Property Amenities

With many people sheltering in place, office properties are relatively empty and time spent at home has never been higher. This makes multifamily amenities increasingly important. The trend of renters seeking well-appointed properties is not new, but in the wake of Covid-19, the value of on-site dining options, co-working lounges, fitness centers and other amenities has never been greater. – Salvador Garcia, MAS Development Group

11. The Internet’s Impact On Land Value

Technology and digital connectivity have disrupted many industries and real estate is not immune. We have been forced to realize that such advances may alter our approach to land use and the built environment. There will be increasing discussion about the effect of the internet on the value of land generally, although we are in the very early stages. – Eliot Bencuya, Streitwise

12. Changes In How Office Space Will Be Used

When demand returns for office, the largest part of the workforce will be hybrid workers that come to the workplace two to three days a week. This is down from four to five days per week meaning a 20 to 30% decrease in demand for office, retail, hospitality, etc. This will dramatically shift how these assets are used and valued. We will see the productization of the office from a couple of products to several. – Jacob Bates, CommonGrounds Workplace

13. Industry Adaptability And Resilience

This trend is truly remarkable as it has shown how resilient the industry is. The market has made huge progress in creating work-from-home environments with management companies investment firms and doing the best they can through the use of many tech support programs. It’s been remarkable to see this trend take life while showing the industry stays strong (thanks to interest rates being low). – Heidi Burkhart, Dane Real Estate

14. Capital Reallocation

As we’ve seen in past downturns, there is a massive reallocation of capital for investment to commercial sectors deemed safer with cash flows that are perceived to be more durable. Look for pricing to tighten and competition to increase in multifamily, industrial, self-storage and medical sectors while loosening in retail, office and hospitality. – Max Comess, Hodges Ward Elliott, LLC.

 

Source: Forbes

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