National Association of Realtors® Chief Economist Lawrence Yun presented an overview of U.S. commercial real estate Tuesday as part of the 2023 REALTORS® Legislative Meetings(link is external). Yun emphasized challenges facing the commercial real estate market brought on by tightening lending policies among many small and regional banks, which have been a key source of commercial loans. Still, due to continuing U.S. job gains, net absorption has been mostly positive nationwide, Yun said, with the apartment, industrial and retail sectors helping to keep the industry relatively stable.
“The performance of commercial real estate markets will vary across the country,” Yun projected during Tuesday’s Commercial Economic Issues and Trends Forum(link is external). “Markets with strong job gains will naturally hold on much better, while those with weaker job conditions will struggle to raise net occupancy.”
Yun said America’s apartment sector recorded 116,000 net positive absorptions in the past year, while the industrial and retail sectors added 361 million square feet and 64 million square feet, respectively, over the last 12 months. Office markets, however, saw a reduction in net absorption by 29 million square feet over the same period.
“The national office market will continue to see rises in vacancy rates due to falling demand,” Yun added. “The apartment sector will record a modest uptick in vacancy due to robust new supply.”
With the impact of mortgage interest rates on the housing market in focus throughout the week at NAR’s conference in D.C., Yun addressed the implications of Fed decisions on nationwide commercial markets.
“The Federal Reserve’s aggressive rate hikes have damaged balance sheets for regional and local banks, an important source of commercial real estate loans,” he said.
Yun estimated that continual rises in rates will in part cause commercial real estate transaction volume to decline by 27% overall in 2023.
“The lack of capital, higher costs of financing and refinancing, and the weakening economy will contribute to a lower overall valuation of commercial real estate prices,” Yun said. “Weaker prices will mean opportunities for those with deeper pockets to get deals done in the months and years ahead.”
Yun added that appraisal values have fallen by an average of 15% from peaks in early 2022.
The National Association of Realtors® is America’s largest trade association, representing more than 1.5 million members involved in all aspects of the residential and commercial real estate industries. The term Realtor® is a registered collective membership mark that identifies a real estate professional who is a member of the National Association of Realtors® and subscribes to its strict Code of Ethics.