WFH Impact on Commercial Real Estate Market

WFH Impact on Commercial Real Estate Market

The State of the Commercial Real Estate Market: A Comprehensive Outlook

commercial real estate

The commercial real estate market continues to face challenges while the housing market gears up for a rebound. Understanding the current situation and predicting future developments is essential. That’s why our highly-experienced ANBLE Letter team is here to provide you with the latest updates and forecasts. By subscribing, you’ll be the first to receive all the breaking news. However, we also publish many (but not all) of our forecasts online a few days later. So, let’s dive into the latest insights.

The Housing Market’s Inventory Challenges

Supply in the housing market has seen a slight increase over the past year, but it remains historically tight. This scarcity can be attributed to the fact that approximately 60% of outstanding mortgages have interest rates lower than 4%. Homeowners are hesitant to sell and lose their favorable borrowing conditions. Consequently, new listings have been declining in recent months, with interest rates hovering around 7%. Even though home prices have dipped slightly from their peak last year, they remain high compared to historical norms and have begun to rise again.

Sales of existing homes have experienced a dip, dropping 3.3% in June compared to May, and 19% compared to the previous year. Further declines are anticipated throughout the summer. However, by the end of 2023, the trend is expected to reverse, leading to gradual growth in sales. A year-end prediction suggests that mortgage rates will fall below 6%, mainly due to a decrease in the 10-year Treasury yield. As a result, there should be a slight improvement in affordability for buyers, which could boost the selling market.

The Office Market’s Ongoing Pressure

The office market continues to face significant challenges as the work-from-home trend persists. The national office vacancy rate reached 18.9% in the second quarter, indicating a surplus of available space. Moreover, construction of new office spaces in the first half of 2023 has lagged significantly behind the historical average.

The prominence of remote work will contribute to rising vacancy rates, as on average, American workers are now coming into the office only half as frequently as they did in 2019. Metropolitan areas with a high concentration of technology companies will particularly feel this pressure, given the prevalence of remote work in this sector. Demand for office space has remained volatile, resulting in little change in asking and effective rents over the past four quarters.

Financing options for offices are drying up, as evidenced by the increase in delinquency rates for securities backed by commercial mortgages on office properties, which reached 4.5% in June — the highest level since 2018. Consequently, some investors are avoiding commercial mortgage-backed securities with excessive exposure to office spaces.

The Future According to The ANBLE Letter

These forecasts are brought to you by The ANBLE Letter, which has been providing concise weekly forecasts on business and economic trends since 1923. By subscribing to The ANBLE Letter, you gain access to valuable insights that will help you understand what lies ahead, enabling you to make the most informed decisions with your investments and finances.

In conclusion, the housing market is expected to face continued inventory challenges due to low mortgage rates keeping homeowners from selling. However, sales are projected to gradually recover by the end of 2023 as mortgage rates decline. On the other hand, the office market is grappling with rising vacancy rates and a decline in financing options. Remote work remains a significant factor in the office market’s instability, with tech-oriented metropolitan areas being the most affected.

So, stay informed with The ANBLE Letter and gain the knowledge necessary to navigate the unpredictable commercial real estate landscape.

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