Sunday, 10 December 2023 08:50

Cloudy Outlook for Commercial Real Estate

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Commercial real estate (CRE) has been in the crosshairs due to a combination of cyclical and secular factors. However, there is a wide dispersion in the sector with some areas facing perilous times like offices and retail, while others continue to experience strong fundamentals like industrial, multi-family, and tech infrastructure.


The biggest cyclical threat is the Fed’s interest rate hikes which have increased the cost of capital, especially with so many borrowers looking to refinance in the coming months and years. Adding to this is that many regional banks are dealing with impaired balance sheets due to falling bond prices and have reduced lending activity to minimize risk. This means that capital is more expensive and harder to access. Another concern is if the economy falls into a recession this could lead to a spike in defaults, downward pressure on rents, and an increase in vacancies. 


Operators in the space must adapt to these new realities rather than wish for a return to the previous era, when low rates and steady economic growth fueled a long bull market. Some recommendations for owners and investors in the space are to upgrade properties, find new capital sources, spend on technology for greater efficiencies, invest in sustainability, and adjust accommodations for hybrid work arrangements. 

Finsum: Commercial real estate (CRE) has faced major struggles over the past couple of years. Yet, there is a wide dispersion in space with some areas continuing to have strong fundamentals while others are in a much more vulnerable position.


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