analysis
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A sharp rise in interest rates last year put the market at risk.
by John Rapley
Can the commercial real estate market sustain itself? Credit: Getty
“survive up to 25 years”. It has become a mantra among owners and lenders in the commercial real estate sector. The cavalry will keep the lights on, make money easier and revive the economy until 2025. Let’s wait for it to appear on the horizon. Until then, let’s wait for interest rates to drop and people to return to offices and shopping centers as occupancy remains low and high interest rates continue to dry up cash.
Commercial real estate, including multifamily real estate, has become an important part of large investment portfolios, especially among private equity and pension funds that prefer a stable source of rental income. However, this field has recently faced difficulties. The closure of office and retail spaces during the pandemic has emptied city centers, and there were initial predictions that the recession would only last for the duration of the lockdown. But the work-from-home habit has proven to be here to stay, and is popular among employees, especially senior executives, and even some managers looking to save money on rent.
There is still debate as to whether the new trend will continue. Many say the cooling job market will weaken companies’ ability to withstand demands for employees to return to the office. Meanwhile, some economists believe that working from home will have a negative impact on productivity and that sooner or later companies will be able to get everyone back to their desks, prompting CRE holders in the retail ecosystem that supports offices from sandwich shops to pubs to They claim that it will bring secondary benefits.
However, some people may not want to rely on it. Nick Bloom of Stanford University has been studying work-from-home patterns for years and believes productivity gains outweigh losses, while vacancy rates are falling. Stable At a higher level.Office vacancy rates remain high in London and the US Highest price in 20 years, and new activity is drying up. As a result, not only your income will decrease, but also the valuation of your real estate.
So far, nothing much has happened. Unlike typical residential or retail leases, large leases in commercial real estate can last for many years, and large tenants may hold the lease for long periods of time. up to 10 years. When it comes to valuations, in such an illiquid market, owners can keep their properties on the books above market value in the hope that prices will eventually return to previous levels. This allowed investors to postpone any potential pain for the time being.
However, the longer this situation lasts, the more anxiety will increase. That’s because this sector is highly influential. Back when credit was almost free, it made sense to borrow money to invest in real estate that paid modest but steady dividends. However, the sharp rise in interest rates over the past year has made the market vulnerable. The mini-crisis among US regional banks earlier this year demonstrated how exposed this sector of the financial sector is to commercial real estate, for example.
So investors may now be feeling some relief as central banks appear to be hinting that an era of monetary easing could return next year. It’s the cavalry they’ve been waiting for for a long time. But if, for whatever reason, central banks are unable to cut rates as quickly as markets currently expect, things could get darker over the next few years. Perhaps not a crash, but a series of smaller crises similar to the Silicon Valley bank failure earlier this year, giving regulators and investors their fair share of sleepless nights.