Upward and Onward: The Commercial Real Estate Market
Despite a waning global pandemic still making waves and perpetuating economic uncertainty and rising interest rates that could potentially hinder the US’s economic growth, there’s a lot of buzz within the commercial real estate market. The past two years have witnessed changes in commercial real estate markets, and a few notable trends are influencing them. Long-term growth appears promising in several sectors, including the industrial and retail sectors, and short-term markets are performing better than expected. While global markets continue to influence the country, leading to increased capital costs and overall market volatility, there is forward movement.
The commercial real estate market is strengthening in several sectors, including industrial and retail.
One area of concern is the office market, which is still somewhat shaky due to the continued trend of employees working remotely and hybrid workplaces. While some corporate entities continue to rethink their traditional work model and stick with a hybrid model, others are struggling with now oversized and underused buildings. Rising costs lead some business owners to pull up their big-city stakes and relocate to less expensive locations, bringing growth to those areas.
From Office to Housing Complex
Investors are now considering converting these large buildings and complexes into residential housing. A great example of conversion is the 10-story Broadway Building, a class B office building in Santa Ana that is being converted into residential units. California has recently approved $400 hundred million in subsidies for office to housing conversions to address the residential housing shortage. Commercial investors are looking into land development on a bigger scale for developing into residential lots, and appeals are being made to local government bodies to rethink land ordinances and zoning regulations that many realtors find overly restrictive.
Another indication of improved commercial real estate markets is the increased rental growth for residential housing, up to as much as ten percent, and rising, as the housing shortage forces more people to rent than buy. This phenomenon leads to an increase in housing development projects that include high-end family-geared communities, which are sprouting up in the more prominent and outlying cities, as developers take full advantage of empty office and corporate building space. Many of these new and hybrid residential communities also include a retail sector to service the community and keep them reasonably self-sufficient.
To keep things in perspective, the current senior director of CBRE, or Coldwell Banker Richard Ellis, has indicated that with regard to the volume of multi-family investments, 2021 saw the biggest asset year in the history of any class. Good news for the commercial real estate industry.
Investing in Future Growth
Other aspects are changing. Investors who have historically focused on stocks are now expressing more interest in commercial real estate as a way to bank on the future. Those who move carefully and practice due diligence are sure to win big dividends, supporting the economy’s growth.
Moving Away from the Big Cities
One interesting growth trend is the migration of workers and businesses to smaller cities and communities, creating a rise in secondary markets. The first apparent reason is financial. Costs are lower than in larger cities like New York or Los Angeles. As businesses move into smaller communities, they begin to attract more workers from the larger cities, who may now be able to afford a home or rent at a more affordable rate.
With this rising trend, speculators are witnessing an appreciation of prices as opportunities continue to increase for workers and businesses.
Strong 2022 Growth Indications
The past year has seen over one hundred fifty billion dollars in dry powder collected in commercial real estate funds, awaiting upcoming opportunities. Leading the trend in growth, industrial and multi-family projects are forecasted, and price appreciation is healthier than in pre-pandemic times.
Rising Construction Costs vs. Existing Real Estate
Due to the upheaval caused by the pandemic, new building projects will continue to be cost-prohibitive with the continually rising costs and shortage of construction materials. Therefore, the trend may swing back toward a demand for existing assets.
Adoption of PropTech
The trend for commercial real estate companies to adopt proptech is growing. Proptech is taking the commercial real estate market by storm, with more companies now looking at partnerships. Last year real estate and property tech companies raised over twenty billion dollars, which is expected to keep climbing as user-friendly software continues to evolve—currently, proptech works within industries such as real estate, home building, and finance.
Office Buildings Improve Their Looks
Investors will start seeing renters returning by providing much-needed upgrades to their buildings. Office complexes are being renovated, creating a more user-friendly, ergonomic, and attractive working environment for companies and their employees. Building owners that improve their spaces with modern amenities, beautiful decor, and improved utilities and technology can expect to see a return on their investment in stabilized occupancy rates.
Investment volume in multi-family dwellings continues to rise, and this trend is expected to continue through 2022. Last year’s volume reached over one hundred and seventy billion, partially due to the shortage of single-family dwellings and the move to what is considered quality housing. The double-edged sword comes into play when wage growth is slower and cannot meet rising rent costs.
The commercial real estate market has seen unprecedented growth during a time when one would expect far less. The unusual and sometimes unpredictable state of flux caused by the pandemic over the past two years continues to create instability in the general marketplace. However, most sectors in commercial real estate seem to be experiencing strong growth and diversity.
Savvy investors see the housing shortage as an opportunity to create multi-family housing communities. Others are converting existing commercial spaces into residential units and almost self-sustaining communities within the larger city centers. The California state government has provided substantial subsidies for office-to-housing conversion. In addition, investors are banking on future builds and watching closely as the commercial real estate market bends and sways with the post-pandemic trends and tides towards a strong future.