The Current State of the Commercial Real Estate Market
The commercial real estate sector is anticipated to experience further decline due to its ongoing underperformance. This is largely attributed to the hesitancy among U.S. employees to fully return to office spaces, as stated by Katie Koch, the CEO of TCW Group, in a Bloomberg article. Koch expressed during CNBC’s Delivering Alpha conference that a significant portion, specifically “one-third of the supply,” needs to be eliminated from the office market.
Koch also highlighted the imminent maturity of $1.5 trillion in commercial mortgage-backed securities, emphasizing the necessity for these to be extended.
The commercial real estate market has been severely impacted by several factors. The adoption of hybrid work models, increasing interest rates, and challenges in obtaining credit due to a regional banking crisis have all contributed to the market’s struggles. A July 2023 report from the National Association of Realtors revealed that office space vacancy rates had increased by 13.5% compared to the same period last year.
The industrial component of the commercial real estate market has also seen a slowdown. Net absorption was reportedly 40% lower than the previous year, and the industrial vacancy rate increased to 5.4%. However, the rate of rent growth was moderate, at 7.2%. Despite these challenges, rental costs for industrial spaces have been escalating at a pace faster than pre-pandemic levels.
Koch maintains a level of optimism, noting that there are still attractive properties that are catching the attention of employers eager to bring their workforce back to the office. However, she also expressed concerns about the broader economy. She believes that economic conditions are more likely to worsen than improve, and anticipates an upcoming recession due to the continued rise in interest rates, which puts additional financial strain on consumers.