Commercial Real Estate Market Trends

Despite experiencing turbulence during the COVID-19 pandemic in 2020 and 2021, commercial real estate is still thriving. The negative forecast for retail and commercial reals estate markets did not happen with the industry performing well apart from a few exceptions (PricewaterhouseCoopers, 2022). With the prolonged disruption from the COVID-19 pandemic and the fundamental rethinking of living and working spaces, real estate continues to attract investment showing an appeal in the sector compared to other investment options. This paper will analyse some of the trends and projections for commercial real estate in 2022.

In 2021, the global commercial sales volume rose by 59% compared to 2020 and by 22% compared to 2019, which was another strong year beating analysts' projections (PricewaterhouseCoopers, 2022). E-commerce has significantly impacted retail as people move from physical shopping to online shopping (Rosenbloom, 2022). However, other commercial sectors like restaurants and malls have seen significant growth, with vacancies decreasing, according to a report by PWC (PricewaterhouseCoopers, 2022). Office space, which represents a substantial percentage of commercial real estate, has seen the most disruption due to COVID-19 upheavals. Even after the rolling out of vaccines and decreased infections, the market has still not stabilized. Although the prospects appear bleak, analysts expect significant growth in the coming year as more and more businesses adopt hybrid working instead of working from home, which will increase office demand (PricewaterhouseCoopers, 2022). Ultimately, the demand will not reach pre-pandemic levels as companies lease out lesser space. With new developments in the pipelines, the expansion of the economy and social distancing in workplaces will not result in the filling of vacancies( Schnure, 2021).

Investors have been re-allocating capital to move into more favourable sectors. In the past two years, the residential and apartment sectors have seen exponential growth, with rents and costs of housing rising exponentially. The trend is happening across North America and Europe with (PricewaterhouseCoopers, 2022). During the pandemic, construction of new units significantly reduced, resulting in rising demand without a commensurating rise in supply. In contrast, with movement restrictions and working from home directives, commercial subsectors of offices and restaurants suffered huge losses driven by reduced demand ( Ibid). As a result, in some cities, investors are converting hotel complexes into residential properties and redirecting capital from the office development to residential developments. The trend has made the capital market and investors in real estate a little more resilient. The move by investors from commercial and retail real estate to the residential segment is driven by lower vacancy rates and lower risk returns compared to the latter. However, as the pandemic goes into remission, uncertainties about new variants and inflation make the sector volatile, especially in the capital and stock market.

Commercial real estate has been exposed to imbalances of over-supply, overheating and high levels of debt risk. However, the three risks appear to have been managed by the pandemic providing relative stability in the market and a high potential for recovery. The development of a commercial property, especially retail and office space, was slow before the pandemic, with only 0.7% completion compared to 1.5% before the 2008 housing crisis ( Schnure , 2021). In 2019, the development of new retail properties was a measly 0.4% of the existing retail property inventory space ( Ibid). Although vacancy rates for commercial properties are increasing and rents are declining due to falling demand for commercial space, the net effect is less catastrophic had there been heavy construction in progress. The low supply will likely match the low demand stabilizing the market and boosting recovery. The small number of new developments in the commercial real estate segment has reduced the need for commercial mortgages, which has exposed the economy to debt risk. Industry experts expected high defaults on loans among commercial real estate developers as cash flows reduced from movement restrictions and lockdown imposition (Schnure, 2021). However, the market was highly resilient, mainly driven by precautionary measures instituted after the 2008 financial crisis.

The economic recovery will help boost the long term outlook of commercial real estate markets. Following the successful rollout of vaccines, economies are likely to experience significant growth allowing businesses and customers to move back to pre-pandemic normalcy. In the United States, the economy is expected to grow at 3% for the remainder of the year (PricewaterhouseCoopers, 2022). The Fed has proposed a gradual increase in interest rates rather than an aggressive hike, which will help stabilize the prices and reduce the possibility of a recession in the long term (Rockey and Bohnaker, 2022). The higher earnings will help offset the expected hike in interest rates that might be proposed to counter the inflation by the Fed (Ibid).

Another trend that is likely to impact commercial real estate outlook is the increase in demand for businesses to meet climate and development goads instituted by the United Nations Sustainable development goals. The Organisation for Economic Co-operation and Development( OECD) has been calling for the reallocation of capital to reduce global carbon emissions (Rosenbloom, 2022). Consequently, financial institutions are now focusing on fiancing green buildings to curb emissions and reduce negative social impacts (Rosenbloom, 2022). Governments and financial regulators are also enacting legislation to guide the sector towards decarbonizing real estate and meeting the sustainability targets.

In conclusion, the commercial real estate market is moving towards recovery. Although the country is experiencing high inflation levels, the increased business operations are expected to drive an increase in demand for commercial and retail space, reducing vacancy rates, generating more income and stimulating higher property valuations Commercial real estate developers also need to align their developments to meet the environmental and sustainability goals and continue to secure funding.

References

PricewaterhouseCoopers (2022). Emerging Trends in Real Estate: The Global Outlook 2022. [online] PwC. Available at: https://www.pwc.com/gx/en/industries/financial-services/asset-management/emerging-trends-real-estate/global-outlook-2022.html [Accessed 20 May 2022].

Rockey, R. and Bohnaker, J. (2022). The Fed Finally Lifts Off: What Rising Rates Mean for Commercial Real Estate (CRE) | United States. [online] Cushman & Wakefield. Available at: https://www.cushmanwakefield.com/en/united-states/insights/us-articles/what-rising-rates-mean-for-commercial-real-estate [Accessed 20 May 2022].

Rosenbloom, D. (2022). Council Post: Seven Trends Driving Commercial Real Estate In 2022. [online] Forbes. Available at: https://www.forbes.com/sites/forbesfinancecouncil/2022/02/16/seven-trends-driving-commercial-real-estate-in-2022/ [Accessed 20 May 2022].

Schnure, C. (2021). The Fed, Interest Rates And The Good News For Commercial Real Estate. [online] Forbes. Available at: https://www.forbes.com/sites/calvinschnure/2021/04/29/the-fed-interest-rates-and-the-good-news-for-commercial-real-estate/ [Accessed 20 May 2022].