Commercial Property Market Analysis: Analyzing Trends In Data Center Leasing – Last year, the plan for the real estate industry was simple: Eliminate current risks and reposition the business for a period of stable growth and increased returns.
. They no longer expect U-turns to the streets before the epidemic. Instead, they accept the possibility that many people will not return to the office afterwards, or at least not very often. This has huge implications not only for office owners, managers and brokers, but also for cities and other real estate sectors that depend on a healthy office market.
Commercial Property Market Analysis: Analyzing Trends In Data Center Leasing
There is also a reluctant acceptance in the industry that interest rates will remain high for at least the next year and possibly longer.
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Even good news, such as investors eager to acquire new assets, is tempered by dismal sector data. For example, even when equity is available, transactions are low – and many in the industry point to situations where buyers and sellers cannot agree on a price because a lack of sales limits price clarity.
The survey believes that the worst of inflation is behind us, which should give the Federal Reserve reason to stop raising interest rates.
“Despite economic problems and challenges in obtaining credit, there are opportunities for high-quality real estate that meet the needs of today’s investors and tenants. Companies must learn to adapt their growth strategies to succeed in these times of higher interest rates for longer. -Andrew Alperstein Partner , housing, United States
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More than three years since the start of the epidemic, real estate industry professionals we interviewed
Most accept that the sector will never return to the way it was before, as patterns of work and commuting behavior are difficult to change – even with corporate demands and incentives to return to the office. Office buildings are also losing their appeal to investors, with sales transactions falling by more than double that of other major property types.
There is now a bifurcated market in the owned and unowned office sector, with some real estate in big cities remaining attractive to corporate America. The properties are usually the newest, safest, healthiest buildings with the highest amenities in the most sought-after locations. Such key facilities attract a disproportionate share of the lease interest. What’s more, the office market in many smaller cities, is growing not only to survive, but to advance even beyond pre-pandemic levels.
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In the coming years, companies with business models that support remote work will continue to reduce their office footprint to save on rent. Complete remoteness can also help companies win the war for talent, as companies that offer remote positions have access to a wider talent pool, which allows them to recruit better workers at cheaper wages. This economy may be too encouraging for them to reverse course and rent office space like before.
So what should office and city owners do with vacant properties? While some in the industry have called for vacant office buildings to be repurposed, industry leaders caution that not all office buildings can be economically converted – even with government subsidies. A better economic solution, they suggested, might be to demolish the buildings and redevelop the land.
Despite the gloomy forecast, some of the industry leaders we interviewed are not giving up on the future of office buildings. They want to learn from how the retail sector has adapted and eventually recovered from the competition it has faced in the past few decades from e-commerce, which has emerged as a viable alternative to shopping in stores.
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U.S. household and corporate debt. appears to be on track for borrowers to repay, with signs of financial distress. That’s usually a positive sign for commercial real estate. However, the rapidly growing federal debt may be more problematic, potentially “stifling” private investment in industry, leading to slower economic growth as well as high interest rates – both of which will drag down long-term construction, investment and returns.
Almost all industry experts we surveyed report that debt (credit) has become less available since the Fed began raising interest rates in March 2022.
Originations have fallen among all major sources of debt, including banks, commercial mortgage-backed securities (CMBS) and life insurance companies, although private debt sources have sometimes stepped in to fill gaps where others have reduced lending. Many survey participants also attributed the decline in sales transactions in 2023 in part to credit availability.
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Not only is there less of it, credit has become more expensive and tightly underwritten. Instead of credit, borrowers have maintained their existing debt, which is reflected in the increase in the amount of outstanding CRE debt. This allows banks to grow their book of business even as they make new loans.
It is a fact that commercial real estate investors are becoming more cautious in their outlook and more selective in their asset selection. We find that investors will slowly line up to take advantage of undervalued assets and acquire new assets. For example, the Emerging Trends Barometer for 2024 posted the highest buy rating since 2010, possibly indicating a recent and expected decline in prices, making it a better entry point for acquisitions after a decade of relentless appreciation.
But optimistic investors, who have aggressively raised capital for distressed real estate, are finding a number of promising opportunities to pursue. These investors have moved to the sidelines in anticipation of more profitable opportunities down the road. Transaction activity in the real estate industry will likely depend on how interest rates change, as the Fed’s high approach to interest rates is likely to slow economic growth.
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After another record-breaking summer, 2023 is set to be one of the hottest years on record. In addition, the number of billion-dollar loss climate events continues to rise.
Property owners and managers now find themselves subject to government regulations and ESG (environmental, social and governance) mandates. In addition, city governments in several CRE markets have enacted regulations in recent years mandating regular energy audits and requiring commercial buildings to implement energy-saving measures.
Property owners are also increasingly concerned about their insurance costs, which have risen — in some cases, dramatically — in recent years. Insurance premium increases are typically left up to renters, but there is concern among some professionals we interviewed that renters in this market may cancel or that costs may limit future rent increases. And that all depends on property owners even looking for coverage, as many insurers have stopped offering plans in areas prone to extreme climate events like California and Florida.
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Apart from rising insurance costs, the increasing correlation between real estate assets and sustainability performance is another key reason for the industry to plan its next steps with sustainability in mind. For years, CRE investors and fund managers have faced complex and difficult choices in figuring out exactly how to move forward with sustainability. Currently, decarbonisation and energy efficiency, indoor environmental quality, climate resilience and related issues are becoming more urgent as extreme climate events increase and risks and costs for owners increase. In the future, investors will likely become more risk averse and will do better due diligence to understand risk and potentially diversify their investments.
, we note that housing affordability has fallen to its lowest level in more than 30 years, as both the cost to sell and rent homes soar to record levels. This year, it’s even worse, especially for home buyers. Rents are also higher, although rising more slowly in some markets.
The industry’s focus on housing affordability is likely to remain in this era of “higher for longer” interest rates. The frightening combination of rising house prices and rapid increases in borrowing costs has put home buying further out of reach for more people.
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The current housing affordability crisis, however, is more favorable to late renters as national rent growth is flat or minimal, after peaking in early 2022. This is the result of a healthy addition to supply, including apartment construction, which is accelerating to add more than 460,000 units in the US this year, exceeding more than 700,000 units since the beginning of the epidemic.
As previously explored, the solution to the nation’s housing crisis is to build more, better at all price points. But the reality is that we’re not building enough units for low-income renters in particular — so not all new supply will increase affordability.
Advances in artificial intelligence (AI), including generative AI, show promise in the real estate industry. For one thing, AI is starting to improve the process of finding and analyzing properties. This reshapes the way real estate investors analyze potential investment opportunities, improves customer experience, helps streamline due diligence and improves fraud detection in real estate transactions, among other activities.
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Shows AI’s potential to generate new sources of demand for office space, especially in traditional tech markets like San Francisco, where most venture capital and AI jobs are based.
However, even though AI has been used in real estate for years, many of the capabilities and functions of our technology are still unknown to the leaders we interviewed. In addition to lack of understanding,
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