Count Lawrence Yun, chief economist of the National Association of REALTORS, as a believer in the enduring strength of the commercial real estate market. The industry just needs a little help from the Fed.
According to a story sent by the NAR, Yun said that he expects commercial real estate activity — aside from the office sector — to revitalize next year.
Yun made his comments at the Commercial Economic Issues and Trends Forum at 2023 NAR NXT, The Realtor® Experience, in Anaheim, California, while discussing economic trends and issues affecting the commercial real estate industry.
“There’s tremendous difficulty in the commercial real estate market with higher interest rates,” Yun said. “Given roughly $3 trillion in commercial real estate loans, roughly $600 billion will come due for refinancing each year and at higher interest rates.”
During his presentation, Yun said that high interest rates are hindering borrowing and making refinancing costly. He also said the Federal Reserve’s rate hikes have hurt small-sized banks.
“The small-sized banks – community and local banks – have much larger exposure to commercial real estate,” said Yun. “So, if commercial real estate is wobbly, it’s not going to hurt the big banks as much as the community banks.”
He referenced changes in commercial loan lending standards, which made an already tight lending situation even tighter. Y
“Commercial real estate transactions activity has been cut in half in two years. The condition for real estate deals is difficult,” Yun said. “(Sellers) simply don’t want to sell at a lower price, so commercial deals are not happening, because sellers don’t want to lower the price, and buyers aren’t jumping in due to higher lending costs.”
In another concern for the industry? Yun said that commercial property prices are falling below pre-Covid-19 pandemic levels and are set to decline further.
“The 10-year Treasury Yield is currently at 4.5%,” added Yun. “Most buildings now are still overpriced in commercial real estate. Property owners have to readjust. Maybe it’s better to get the deal done today rather than waiting until the future, when property values may be even lower.”
Rent growth is the strongest in the industrial field and weakest for offices, according to Yun. The office leasing net is negative, and retail leasing is also fizzling out. Even warehouse and industrial space leasing is low.
Yun discussed how the office vacancy rate is rising and will likely rise further. He flagged that big cities are seeing the highest rise in office vacancy rates: San Francisco followed by New York City and Los Angeles. He flagged that big cities are seeing the highest rise in office vacancy rates: San Francisco followed by New York City and Los Angeles.
“By an objective measure, the economy is strong,” said Yun. “GDP growth is at 4.9%, but there are some worrying signs for the economy. First, businesses are not borrowing, because they’re cutting back on spending. Second, good inventory – or products produced – is increasing, but goods are not being purchased. Thus, there’s concern for future GDP.”
Yun said unemployment rates are the highest in nearly two years and wage growth is the weakest it has been in two-and-a-half years.
After explaining that monthly job gains are softening and diminishing each month, Yun asked, “The federal reserve is raising interest rates to tame inflation, but are they going to break the economy?”
Yun says that the 2024 economic outlook depends on the Federal Reserve’s policy, stating that as inflation lessens, the Federal Reserve should consider cutting interest rates. Once that happens, Yun says, commercial real estate sales will see a revival.