There is no doubt that the real estate market is in for a turbulent time. Mortgage applications have dropped to a 28-year low, Columbia Property Trust Inc. has defaulted on $1.7 billion in loans, and Business Insider is warning that Americans have yet to feel the full impact of the FED’s continual rate hikes in 2022. Even so, the question remains: is this a temporary recession, after which the real estate market will make a full recovery? Or is the real estate market caught up in a total economic collapse from which there will be no recovery in the near future?
The truth is that there are so many factors that affect the supply, demand, and value of real estate that it is impossible to make accurate blanket statements about how the sector will perform this year and in the coming years. Some real estate sectors are certainly doing poorly and there is good reason to be pessimistic about future performance. Office real estate, for instance, gained little to no value from September 2021 to September 2022. While companies have called workers back to the office and the number of people who work from the office is greater than it has been since the COVID-19 pandemic began, there are still far fewer people working from an office building than there were before COVID-19 started. What’s more, over 530 companies have announced layoffs since the beginning of 2023, putting further pressure on a sector that may never regain its pre-pandemic worth. Retail real estate in 66% of the country is slowly recovering, but experts are concerned about the pace of recovery, noting that lack of consumer confidence in the economy, the growing popularity of online shopping, and recent layoffs could put pressure on the retail real estate market.
Industrial real estate, on the other hand, is performing incredibly well nationwide, spurred by increases in EV production, the biotech industry, and computer chip manufacturing. Furthermore, the growth of the online retail sector that has negatively impacted retail real estate is a boon for industrial real estate as demand grows for warehouse and order fulfillment space. Vacancy in this sector is under 4%; however, J.P. Morgan accurately notes that some investors may find it challenging to turn a profit in this sector as long-term leases only account for inflation rates of up to 3%. If inflation continues to rise as it has in the last two years, investors may struggle to turn a profit from this sector. Multifamily properties are also performing well in the current environment as a growing number of Americans put their plans to buy a house on hold until mortgage rates come down. As of September 2022, the vacancy rate for multifamily units was 4.4%; what’s more, cost increases incurred by an investor in this sector can be passed on to tenants in the form of rent hikes.
While there is no doubt that some commercial real estate sectors are facing unprecedented challenges, others are thriving because of current economic conditions. What’s more, seasoned investors who have available finances may want to seriously consider taking advance of this turbulent period to increase their holdings in potentially profitable sectors. The real estate market has always experienced ups and downs but tends to rise in value long-term, making it an ideal investment option for novice and seasoned investors alike.
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