The global pandemic may have faded into the background, but its lingering effects and growing economic hardship have delivered an unexpected shock to the commercial real estate industry since the beginning of the year.
Many expected 2023 to be the year when trading activity picks up again. Instead, a sharp rise in inflation and soaring interest rates caused real estate companies and economists to postpone their recovery forecasts. The current consensus seems to be mid to late next year.
The Fed recently signaled that rate hikes may be completed. Guessing when the Fed will start cutting rates and why has become a popular parlor game. Do member states need to act because their economies are too weak, or because they no longer need such powerful drugs in a so-called soft landing?
“We are at peak uncertainty,” Michael Geipen, Bank of America’s chief U.S. economist, wrote in a recent global market report about the trajectory of interest rates.
As the “soft recession” continues, property owners in the office, multifamily, retail, industrial and hospitality markets have had to navigate other unexpected twists and turns of the year so far. Here are a few:
This year was supposed to be the year employees started returning to the office. But getting people back to their desks has proven more difficult than many expected, and the office real estate market has borne the brunt.
It’s not for lack of effort. Companies across the country have implemented a variety of strategies, including time and attendance apps and the threat of tying face time to annual performance reviews. Many settle for a hybrid policy that requires her to be in the office 3-4 days a week.
Still, office occupancy remains below pre-pandemic levels in major metropolitan areas across the country, according to data tracked by Castle Systems and its Office Admission Card Swipe System. It remains close to 50%.
Businesses across the country have reduced their space needs throughout the year. For example, Snapchat’s parent company earlier this year implemented revised in-office mandates that require employees to be in the office at least 80% of the time. Still, the social media giant is considering moves to free up up to three-quarters of the internal space it occupies at its headquarters in Santa Monica, California. This suggests that simply promoting a return to the office may not be enough to solve the problem. Post-pandemic domestic vacancy issue.
Office leasing activity has been plagued by weak demand and high vacancy rates, and many were bracing for an even bleaker picture in 2023. However, there was one unexpected bright spot. It’s the construction of a new office.
In leading cities around the world, a handful of developers are shedding short-term doubts about the state of the market as confidence grows in demand for luxury space. Deloitte’s 2023 Winter London Office Cranes Survey reports that more than 5.1 million sq ft of luxury office space has begun construction in London this year, the highest amount in nearly 20 years.
“Interestingly, the developers we spoke to seem to be more concerned with supply than demand for luxury space,” said Margaret, partner and chief insight officer for financial services and real estate at Deloitte.・Mr. Doyle recently told CoStar News. “The macro environment for London’s office market remains challenging, but for now developers appear willing to bet that building premium office space will continue to attract occupiers to the metropolis.”
In the United States, the market’s limited rental activity is focused on the newest and greatest properties. While older properties are experiencing an extreme lack of demand, buildings built within the past three years are even reporting stronger quarterly rental volumes than in the decade before the pandemic, according to CoStar data.
Earlier this year, the world’s largest technology giants slashed their global real estate portfolios and moved to hybrid or remote work in anticipation of a slowdown in demand for their services.
It was a shock to San Francisco and other tech markets to see one of the most greedy occupiers in recent years suddenly go on a diet. But then hope came in the form of an industry based on virtual worlds, namely artificial intelligence, which demonstrated a new desire for physical space.
The year’s explosion in office leases to AI companies means the tech industry is once again a major source of office lease growth, with tenants accounting for about 16% of the U.S. total, according to CBRE. The company has signed contracts for more than 7.3 million square feet of space. The entire office market. This boost helped boost regions like the San Francisco Bay Area, New York, Boston, and Los Angeles, as startups quickly took over the space needed to accommodate ambitious growth plans.
“You need human intelligence to create artificial intelligence,” said Colin Yasukochi, executive director of CBRE’s Tech Insights Center. “This is such an emerging field that we need people to come together more to collaborate and innovate, and that’s becoming increasingly important.”
WeWork’s decision to file for bankruptcy protection seemed all but inevitable in 2023. That filing was the result of a disastrous decision to lock in long-term leases to provide short-term rentals, a strategy that was revisited when the pandemic forced many companies into bankruptcy. To work from home. But the company’s bankruptcy has overshadowed the rise of a wave of startups looking to capitalize on the growing demand for flexible space.
In addition to trying to differentiate themselves in an increasingly competitive industry, most, if not all, companies are looking to avoid the mistakes made by WeWork and other early providers of flexible office space. This means opening locations beyond office towers in central business districts, securing less risky leases and hosting more meetings and events, even if it means lower growth rates. It means providing space.
As WeWork moves forward with bankruptcy proceedings and seeks to forgive most of its billions of dollars in financial debt, it will likely look very different from the high-flyer that has garnered so much attention. But whatever the outcome, the global coworking industry has shown that it still has a future.
Industrial space has long been considered a less glamorous asset class, but its status has risen significantly during the pandemic. COVID-19 has caused more people to shop online, resulting in the need for more distribution centers to ship and store products.
In response to demand, annual rent growth jumped to 11.1% in Q3 2022. At the same time, the number of vacancies has plummeted nationwide, and bidding wars have broken out over the few remaining vacancies.
Analysts and others expect more of the same this year, saying the sector could be an anomaly among real estate asset classes. However, households began spending less in 2023 due to inflation, rising gas prices and other factors, resulting in less spending on goods. As a result, retailers scaled back plans to build large distribution networks, and industrial land construction correspondingly fell by 31% year-on-year. Meanwhile, the industry vacancy rate has increased to 5.6% nationally, which is close to the 10-year average.
A year that started with very high expectations ended with it looking like the sector may have reached its peak.
Early in the pandemic, owners of shuttered hotels, many of which were not legally allowed to operate during the public health crisis, predicted that they would eventually have to sell their properties. was there.
Today, those predictions appear to be overestimated. In fact, overall sales for hospitality real estate, like other commercial real estate assets, plummeted in 2023 due to rising debt costs. Additionally, the gap between bid and ask prices remained wide throughout the year as buyers and sellers were unable to agree on pricing for hotel properties.
But investors raised money in anticipation of distressed deals. But rising inflation eroded the value of that capital, and some chose to put that money to work in other ways.
Overly optimistic real estate investors thought interest rates wouldn’t stay high for long into 2023.
Of course, that didn’t happen.
Inflation has proven difficult to contain, with interest rates currently at their highest levels in nearly 20 years, suppressing demand for commercial real estate purchases. Rather than expecting rates to go down, many have begun to embrace the Fed’s new “keep rates high for longer” mantra.
Some expect the Fed to cut interest rates in early 2024, but it remains to be seen how much they will ultimately cut. Inflation has declined over the past month, with prices rising 3.1% in November, but inflation remains above the Fed’s 2% target.