The shifting landscape of commercial real estate
- Markets & Investing
- Article
As the office buildings market faces headwinds, investors look to alternative sectors.
Despite many organizations calling for employees to return to the office, remote and hybrid work is here to stay. Almost two thirds (64%) of global workers surveyed said they’d quit their jobs if they were required to be in the office full time.1
This new work model has dramatically decreased demand for office space, bringing vacancy rates to all-time highs and dropping office prices by more than 15% year over year in the U.S.2
But work-from-home isn’t the only shift brought on by the COVID-19 pandemic changing the commercial real estate landscape. Demand is rising in sectors that reflect consumers’ online shopping habits and the challenges facing the residential housing market.
Clear signals
The numbers tell the story: June 2024 brought 647 commercial real estate foreclosures – a 14% drop from the previous month but a 48% year-over-year increase. These foreclosures have been rising steadily since their record low in May 2020, when lenders were offering loan forbearance to help companies stay afloat during the pandemic.3
The trend doesn’t look to be letting up any time soon. Nearly $3 trillion in commercial loans will come due between now and 2027, and while borrowers would typically roll their debt into another loan, that’s a less viable option in the higher interest rate environment that began in 2022.3
Manyof these commercial mortgages were made during a period of historically low interest rates. Borrowers may have a hard time finding favorable terms when interest rates are well above the 2% and 3% rates of their existing loans. And with risk-averse lenders holding to tighter loan standards, commercial real estate buyers may struggle to secure financing – especially if their assets have an almost 20% vacancy rate.
Even if U.S. workers eventually do return to the office en masse, challenges remain for office inventory. According to real estate services firm Cushman & Wakefield, nearly 60% of office inventory needs reinvestment or upgrades to remain competitive, and another 20% will need to be completely reimagined and repurposed.4
Rising demand
While office space is less in demand, other changes and emerging priorities are leading to increased demand for commercial space:
We’re storing more data. With the proliferation of AI and explosive growth in streaming, ecommerce and communication technologies, demand for data centers is booming. Data centers are facilities built to house and operate servers that host data and internet applications that have strict requirements for power, temperature control and security. Between hyperscale companies like Google and Amazon and enterprises hosting large amounts of information, the need for data centers is projected to double by 2030.5
We’re storing more stuff. The prevalence of ecommerce is driving demand for warehousing, especially cold storage to accommodate consumers’ growing appetites for purchasing groceries, meal kits and pharmaceuticals online. Demand for public/self-storage, which is driven by major life events rather than broader economic trends, continues. Self-storage facilities are used by around 40% of the U.S. population and have an average occupancy rate of 92%.6
We’re traveling. The hotel industry has rebounded from pandemic travel restrictions, driven more by leisure than by corporate travelers. In 2023, average revenue per available room topped pre-pandemic levels in America and Europe.7
We’re renting. Soaring home prices – along with high interest rates – continue to make renting homes an attractive and often necessary option, creating a need for multifamily and single-family rental properties.7
The commercial real estate landscape will continue to change as industries adapt to evolving consumer behaviors. Investors, too, should be aware of shifting market demands in order to capitalize on emerging trends.
1 People at Work 2022: A Global Workforce View, ADP, published April 25, 2022, accessed July 31, 2024
2 RCA CPPI™ US Commercial Property Prices Indexes, MSCI, February 2024.
3 Commercial Foreclosures Spike by Nearly 120% in the last 12 Months, Yahoo Finance, published May 2, 2024, accessed July 31, 2024
4 U.S. Macro Outlook: Mild Recession ≠ Pleasant, Cushman & Wakefield, March 2023.
5 U.S. Commercial Foreclosures Decrease in June 2024, ATTOM, published July 17, 2024, accessed September 3, 2024
5 Investing in the Rising Data Center Economy, McKinsey & Company, published January 17, 2023, accessed July 31, 2024.
6 Self-Storage Isn’t Just for Hoarders: A Primer for Investors, Forbes, published September 5, 2023, accessed September 3, 2024.
7 2024 Real Estate Outlook: Finding Terra Firma, Deloitte, published September 21, 2023, accessed July 31, 2024
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James.
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