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The commercial real estate (CRE) industry is facing its worst crisis since the Great Recession in 2008. Business Insider reports that high interest rates and continuing inflation have put the brakes on loans for commercial property. Foreclosures are surging, construction of new office buildings is declining, and vacancy in existing office buildings is rampant. There are many reasons why CRE is in ICU:

1. INFLATION

Inflation impacts everything, including commercial real estate. The combination of economic problems and COVID fallout is still affecting the CRE market and leading to high vacancy rates and loss of business.

2. INTEREST RATES

Banks are lending less and charging higher interest rates for the loans they make to owners and buyers of office buildings, shopping centers and other commercial property. The tightening is a response to the sharp increase in interest rates triggered by high inflation as well as concerns of a possible recession that would lead to an increase in defaults, according to the U.S, Government Accountability Office.

3. REMOTE WORK

Since COVID, remote work from home has become very popular and has remained popular – keeping workers from commuting to cities and creating major losses of revenue. New York City is trying to rebound with incentives and tax breaks but as of the end of 2023, the CRE vacancy rate in Manhattan was at a record 22.7%.

San Francisco’s office vacancy rate climbed even higher in 2023, according to commercial real estate firm CBRE. Office vacancy rose from 31.6% to 33.9%, a new record high for the city.

4. INNER-CITY CRIME

There’s no question that crime, homelessness, and drugs that are plaguing cities are having a big impact on the CRE market. As long as people fear for their safety, workers won’t go into many downtown cities even if they were driving a Humvee to their job.

One veteran entrepreneur and investor Grant Cardone is uniquely optimistic. He is expecting the “greatest real estate correction” of his lifetime. Cardone sees offices and apartments slumping in value, presenting bargains for savvy buyers.

“It will not be single-family homes, but it will include offices and apartment complexes,” Cardone says. “It’s going to be a great opportunity for individuals – regular, everyday people – to actually grab trophy real estate from institutions. This has never happened in this country. It’s going to be at epic levels.”

So, what’s going on? Is this the canary in the coal mine? Is it a foreshadow of a residential real estate collapse? No – there will always be a demand for new homes as long as mortgage rates stay at 7%  – preferably 6% or lower. Federal Reserve Chairman Jerome Powell is pulling out all the stops to make this possible – especially since 2024 is an election year.

The National Association of Realtors (NAR) says that while 2023 impacted all facets of commercial real estate, marked by an increase in vacancy rates and a deceleration in rent growth, 2024 will be a better year for commercial real estate.

Although market headwinds will persist, the anticipation for 2024 is that lower interest rates will mitigate these challenges. The Federal Reserve has already paused interest rate hikes since last July, while rate cuts will likely follow during the first quarter of 2024. This could reduce cost for borrowing capital and, consequently, stimulate investments in the commercial real estate market.

In other words, the commercial real estate industry is going to get a little bit better in 2024.