A one-two punch – value declines due to higher interest rates, and lower office and retail demand – has created the biggest commercial challenge since the 1970s.
NEW YORK – The sudden surge in interest rates caused property values to fall, while the rise of remote work and e-commerce reduced demand for office and retail space. Those two forces haven’t come together on this scale since the 1970s, according to economists and investors.
The U.S. office vacancy rate reached a milestone in the first quarter when it rose to 12.9%, exceeding the peak vacancy rate during the 2008 financial crisis. However, some analysts say the current commercial property downturn may well end up less severe than the previous two downturns, in the early 1990s and after the 2008 financial crisis, especially if the U.S. economy avoids a deep recession and interest rates start to come down quickly.
But the deeper problems facing office and certain retail property owners mean building values are less likely to rebound to new highs the way they did after those previous meltdowns.
Depressed building values could hurt cities, which depend on property-tax revenue. It can also weigh down bank’s balance sheets, leading to less lending throughout the economy.
New technologies and changes in the way people live and work threaten many landlords, says Ben Miller, CEO of property investment firm Fundrise.
However, not all commercial real estate looks imperiled. Data centers and warehouses have benefited from e-commerce and remote work. Apartment rents are well above prepandemic levels, and most analysts expect the country’s housing shortage to persist, which supports higher rents.
Source: Wall Street Journal (04/24/23) Putzier, Konrad
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