The Current State of CRE: A Deeper Dive Beyond the Obvious
The narrative surrounding commercial real estate has been dominated by the pandemic-induced shift from office spaces to work-from-home setups. However, there's more to the story than just empty office buildings. Here are my thoughts on hearing what bigger names in the industry said.
Resources:
Commercial Real Estate Is in Trouble, but Not for the Reason You Think - https://www.morningstar.com/alternative-investments/commercial-real-estate-is-trouble-not-reason-you-think.
CNBC Features Marcus & Millichap CEO Hessam Nadji - https://www.marcusmillichap.com/news-events/videos/2023/08/commercial-real-estate-distress-may-be-overblown---property-prices-adjusting-to-higher-rates?utm_source=marketing&utm_medium=email&utm_campaign=CNBC
Key Takeaways:
The pandemic led to a significant exodus of workers from offices, sparking concerns about the future of commercial real estate.
While downtown offices have been the focal point of discussions, they represent only a fraction of the commercial real estate market.
The U.S. commercial real estate sector is valued at approximately $20 trillion, with offices accounting for just 15% of that market.
Delinquencies in office real estate remain below 5%, and the majority of office infrastructure is located in the suburbs.
The real concern lies in the multifamily residential sector. Many property developers took out loans in 2021 to finance new constructions, and these loans are set to mature soon. With over $8 billion of multifamily commercial mortgage-backed securities (CMBS) expected to come due in the latter half of this year, the industry is bracing for what some are dubbing "the red October."
As a result, multifamily real estate firms might resort to increasing rents to offset higher operating costs. In fact, asking rents have surged by 17% year over year, with the average rent in the U.S. now standing at a record $1,850 per month.
Reflective Insights:
Beyond the Office: While the decline of office spaces is evident, it's crucial to look at the broader commercial real estate landscape. The multifamily residential sector's looming challenges could have more profound implications.
The Rent Dilemma: With rents already at an all-time high, how will the market respond to potential further hikes, especially considering renting is still 30% cheaper than owning a home?
Banking and Real Estate: Regional banks have been the primary lenders for many of these property developments. With these banks now under scrutiny for their risk management practices, how will this dynamic impact the refinancing options available to real estate firms?
No one has a crystal ball but where do you see the state of CRE going in the near future?
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