Recent headlines about the commercial real estate (CRE) industry’s impending doom are rattling even experienced investors. Probably the most cited is the recent bearish report by Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management, who forecasts a “peak-to-trough CRE price decline of as much as 40%, worse than in the Great Financial Crisis (1).”
Rising interest rates and tightened lending standards have created significant challenges for CRE investors, especially those that operate in sectors that also face declining demand. The majority of the doom and gloom is focused on the collapse of the office sector due to the rise of remote work during the pandemic and beyond.
When discussing the outlook of CRE in the U.S., it’s important to keep in mind the sheer size and scope of this market. Our company, Gumption, is focused on CRE debt capital so let’s frame the industry with that lens. In 2022 alone, $862B in commercial debt was originated (2) across a multitude of different sectors. In addition to the office, other sectors include multifamily, retail, industrial, hospitality, etc. Each of these sectors varies further by geographic markets, subsectors, and classes, etc. Needless to say, it’s not all negative across the board in CRE. In fact, multifamily and industrial remain healthy in most markets. Meanwhile, retail real estate vacancy is at the lowest on record.
Linda Moss from CoStar News comments,
"Growing demand and still limited new supply additions have kept the U.S. retail space market at its tightest level on record, with just 4.8% of all retail space available for lease" as of the end of the second quarter(3).
The WSJ reported recently that, “Strip malls are hot,” explaining the growing popularity and high occupancy in this retail subsector (4). This is another example of another bright spot in a fast-changing industry.
As an example of regional market strength, Tiffanie Robinson, CEO of SVN Second Story Real Estate, makes a bull case for CRE in Chattanooga and other growing cities in the Southeast in her recent post, “The Sky is Not Falling.”
“Every point in the real estate market cycle calls for prudence and deliberate decision-making, and 2023 is no different. But national trends are not indicative of every market. A 20 percent vacancy rate in New York demands a different response than a 4 percent vacancy rate in Chattanooga (5).”
The point is that CRE is a large, dynamic industry with pockets of weakness and pockets of strength. While we’re not Wall Street analysts, we’re betting the industry will continue to evolve rapidly and also show resiliency over the long haul. We also know that there’s almost $1.5 trillion of US CRE debt coming due for repayment before the end of 2025 (6) and Gumption will be here to help broker these debt-financing transactions.
Email me (jon at Gumption dot dev) if you’re interested in partnering or learning more about our product.
Gumption is an intelligent, retail-focused marketplace revolutionizing how commercial real estate professionals access debt capital.
We believe that commercial real estate (CRE) professionals are the driving force in shaping the spaces in which we live, work, and play. Our mission is to empower CRE professionals to build and improve communities.
Remember that the health of commercial real estate sectors can vary based on regional and local market conditions, economic factors, and changes in societal trends. It's important to conduct thorough research and consult with industry experts to get the most accurate and up-to-date information for your specific situation.
