3 things to know about the commercial real estate
This year hasn’t been the greatest for commercial real estate. We’re not breaking any news with that statement. However, there are still opportunities to be had in this area for investors, developers and others, and we want to make sure our partners and customers are ready to succeed.
So, what should players in this world keep in mind going forward? We’re glad you asked! A podcast by one of our trusted underwriters recently tackled this issue with Jamie Woodwell, a Vice President of the Mortgage Bankers Association. There’s plenty of great stuff in the episode for anyone who wants to dive in, but here are three (largely positive) takeaways.
Adaptability continues to be key. We’re talking about the people involved and the properties themselves. Despite everything going on in commercial real estate, innovation hasn’t stagnated. Businesses and property owners have been adapting to the market’s evolving needs. Some key examples of this are repurposing underutilized commercial spaces, leveraging technology for virtual tours and the rise of mixed-use properties—this spirit of flexibility and different thinking will certainly power future success. However, switching an office building to multiple residential apartments, for example, isn’t a simple endeavor, Woodwell cautions.
“It’s seldom the case that you can just change the sign out front from office to apartments, and you’re good to go.” he said. “At the very least, you need to go in and change the plumbing and the layout. Depending on the structure, you might need to go in and do a whole lot more physical work than that, up to the point of essentially raising the building and rebuilding a new structure.”
The commercial world is trying to figure out interest rates, too. Like on the residential side, those involved in CRE are dealing with the new reality of much higher interest rates. What they mean for loans that are maturing, properties that need to be refinanced, and those that are being bought and sold are all still being sorted out.
“There are some great opportunities out there if we can get transactions happening again,” Woodwell said. “But there’s a bit of a logjam in the market right now because of questions about the fundamentals of some property types, because of uncertainty around property values, and because of the volatility and adjustments in interest rates, just not much transaction activity has taken place.”
Location and type of CRE property matter. Despite the market’s overall struggles, activity in certain geographic areas and sectors is still going strong. Whether it’s the demand for warehousing spaces or the rise in flexible workspaces catering to hybrid work models, there are avenues for investors and businesses to explore and capitalize upon. Even the multi-family apartment sector, which had been a hot commodity, is cooling right now for a multitude of reasons.
“It still remains one of the most sought-after property types. That being said, there’s a lot of new construction coming on line, which has slowed rent growth,” Woodwell said. “It’s also being impacted by the interest rate rise and volatility and questions about property values.”
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