• Thu. Dec 1st, 2022

Commercial real estate market expected to grow despite rising interest rates

ByWillie M. Evans

May 4, 2022

NATIONAL HARBOUR, MD (May 4, 2022) – As rising interest rates pose a risk to economic growth, NAR Chief Economist Lawrence Yun expects the commercial market to perform well despite the headwinds, especially in the short term.

During the 2022 REALTORS® Legislative Meetings Trade Economic Issues and Trends ForumYun explained that while the trading market generally follows the overall economy, some things are different this time around.

“Apart from the office sector, which is lagging behind as employers allow more flexible working remotely to retain and attract talent, commercial real estate continues to strengthen,” Yun said. “The industrial sector is booming, retail is turning positive again, the hospitality industry is recovering, apartments are doing very well and rents are rising across all business sectors.”

Yun added that the shortage of residential housing will lead to solid growth in rents over the next two years, with apartment rents expected to continue to increase by more than 10%.

Compared to the struggling office sector, Yun noted that the industrial property market is getting a boost from the shift to inventory accumulation “just in case” as wholesale inventories soar.

“With strong demand, industrial rents are expected to continue to rise sharply over the next two years while vacancy rates will remain below 5%.”

Although the office sector continues to face challenges, Yun said not all markets are equal.

“While the overall office market is volatile, there are variances based on location. We have seen improvement in some mid-sized markets as businesses seek more affordable office locations away from major US cities. “

Multifamily investment volume in 2021 was the largest year for any asset class in history, with $352 billion in investments, according to Matt Vance, senior director, CBRE.

“Global economic uncertainty, persistent inflation and rising interest rates have increased the cost of capital and overall capital market volatility,” Vance said. “These conditions have restricted loan proceeds, which has had a negative impact on asset pricing.”

Vance expects that with the rise of hybrid work models, employees will spend an extra day or more working remotely compared to pre-pandemic trends.

“An average workweek with 3.5 days in the office would lead to a 9% reduction in office demand, but that’s if it could happen overnight,” he said. “Future economic growth and job creation will have a balancing effect on the impact of virtual work.”

Yun urged commercial investors to consider land development as an investment opportunity given the scarcity of developed residential lots that are essential to address the housing shortage. He appealed to local governments to relax regulations and land zoning ordinances, which estate agents say have become more burdensome.

The National Association of Realtors® is America’s largest trade association, representing more than 1.5 million members involved in all aspects of the residential and commercial real estate industries.

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