In a compelling presentation at the Commercial Economic Issues and Trends Forum during the 2023 NAR NXT, Lawrence Yun, Chief Economist of the National Association of Realtors (NAR), indicated that the commercial real estate sector is poised for revitalization, calling on the Federal Reserve to consider a crucial move – cutting interest rates.
Yun emphasized the formidable challenges facing the commercial real estate market, particularly the impact of elevated interest rates. With approximately $3 trillion in commercial real estate loans, a substantial $600 billion is set for refinancing each year at higher interest rates, hindering borrowing and increasing refinancing costs.
“High interest rates pose a significant hurdle, especially for small-sized banks that have a more substantial exposure to commercial real estate. The wobbliness in this sector is felt more acutely by community and local banks than their larger counterparts,” explained Yun.
Commercial Real Estate Market Dynamics and Trends
Yun highlighted a significant reduction in commercial real estate transaction activity over the past two years, attributing it to the reluctance of sellers to lower prices and the deterrent effect of higher lending costs on potential buyers. Commercial property prices are dipping below pre-Covid-19 levels, prompting Yun to suggest that property owners may need to readjust their expectations.
Notably, Yun identified variations in rent growth across different sectors, with industrial spaces showing the strongest growth and office spaces experiencing the weakest. The office vacancy rate is on the rise, particularly in major cities like San Francisco, New York City, and Los Angeles.
Economic Concerns and Outlook
Despite a robust GDP growth rate of 4.9%, Yun expressed concerns about the economy. Businesses are cutting back on spending, leading to a rise in inventories without a proportional increase in purchases. Unemployment rates are at their highest in nearly two years, and wage growth is at its weakest point in two and a half years.
The federal reserve is raising interest rates to tame inflation, but are they going to break the economy?” Yun questioned, pointing out that monthly job gains are softening, and there are worries about the future GDP.
Looking Ahead: The Role of the Federal Reserve
Yun contended that the 2024 economic outlook hinges on the Federal Reserve's policies. He suggested that calmer inflation data might warrant a consideration of interest rate cuts in early next year, potentially halting the ongoing weakness and fostering a revival in commercial real estate.
According to Yun, interest rate cuts could recapitalize community banks, stimulate GDP growth, and contribute to increased net leasing and investment sales, signaling an overall revitalization of the commercial real estate sector, excluding office space.