Is There Hope for Commercial Real Estate?
When the commercial real estate market provides information like the following, is it any wonder whether it will recover. For example, commercial real estate in the pre-pandemic period saw strong financial reports. Selling real estate is already difficult enough. Add on all of the craziness that the world is experiencing, and you’ll see why people are worried.
Mid and post-pandemic data have revealed loan rates rising, banks tightening their lending belts, and a drastic change in how people are living and working. All of which has had a troublesome outlook for many property sectors.
What Is Occurring?
We must remember that the commercial real estate market is unlike the residential sector. Commercial real estate operates on long-term leases and their operating turnover is slower. Currently, there is a lower demand for leased spaces. Commercial real estate is incurring higher operating costs because of the demand to supply healthier safety measures within office spaces. At the beginning of 2020, operating costs have increased by at least $19.4 per square foot which is half of the average annual rental amount for office spaces. As a result, a large number of commercial businesses are reducing compensations, they have frozen promotions, lessened work hours, and had to lay off some of their workforces. There was also remote work and closed offices, which became the norm.
In more recent times, industrial development has increased nationally, fueling hope for commercial real estate. Larger developers are gaining interest in creating pipelines across the US. Although the commercial real estate industry has been up and down, companies are still developing new industrial projects.
What Other Changes Are Taking Place
With a forecast like this, what is the future of commercial real estate? The commercial real estate market has survived previous bleak-looking pictures and has risen like the phoenix from near ashes. This market will survive but it will look different.
There is a future for the commercial real estate sector. What is taking place is that the commercial field will rise up through technology. At the basic level, commercial businesses must perform at a less expensive style. They will need to restructure, outsource, use data-driven systems to meet supply and demand, reduce leasing space, etc.
Additionally, businesses must use a combination of robotic automation, AI automation, and cloud automation. Don’t bury the commercial real estate sector just yet. While some commercial enterprises are fledgling, others are not.
All Things Being Equal
An example is that hotels and old shopping malls are struggling. On the other hand, commercial businesses like apartments, industrial warehouses, and self-storage facilities are operating relatively well.
Take the states and cities that rely on tourism, like Atlanta, New York, and Florida. Until the U.S. population can freely fly, spend money, and come together more often, recovery will resume.
Yet, cities that are not tourist-driven like Cleveland, Ohio, and Salem, Oregon will recover faster. The commercial real estate market is not evenly divided, there will be some inconsistencies, but as long as there is a post-pandemic uptake, the market will survive.
There is optimism in the commercial real estate market. Numbers are climbing and are showing signs of recovery and activity, but this does not mean that it will go back to business as usual.
Considering the scenarios above, it seems that the commercial real estate sector has permanently changed. It appears that co-working spaces will likely be on the rise, but offices will certainly not be as large or prominent as they once were. No, the market is not dying, it is just shifting.
For investors, stay in the commercial real estate market. The more financially rewarding returns are being experienced in REITs. REITs provide higher dividends that can be reinvested. This safe investment sector has traditionally remained strong even during hard times.