From the President's Desk Construction

Commercial Real Estate – That Hurt!

By Alan Beaulieu on April 20, 2023

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Alan Beaulieu

With a reputation as an accurate, straightforward economist, Alan Beaulieu has been delivering award-winning workshops and economic analysis seminars across the world to thousands of business executives for the last 30 years.

Use caution if you are planning on investing in commercial real estate.

  • The National Commercial Real Estate Index (12-month moving average) has fallen 11.8% since May 2022.
  • 70% of the commercial real estate financing is held by small/regional banks, which are NOT currently looking to take on risk .
  • In combination, the wall of refinancing in the future could become problematic and exacerbate the value situation.
  • The level of caution needed varies by location and type of property.

Not a Horrible Situation

Do not mistake “caution” for “run away as fast as you can.” The Commercial Real Estate Occupancy Rate stands at 93.3% (12MMA) and is rising. The rate is up appreciably from the March 2021 nine-year low of 90.3% and is just under the December 2018 record high of 93.8%. The situation from a cash flow perspective can be assumed to be good, which makes it possible to service the record-high Commercial Real Estate Loans (12MMA at $2.735 trillion) through at least the near term.

Sector View

Occupancy rates (all 12MMA) vary by sector.

Apartments 95.91% Essentially even with the Sep 2022 record high of 95.97%
Industrial 97.22% Record high
Retail    96.1% Record high
Office 89.3% Lowest in just under 10 years; rates-of-change suggest a near-term cessation of decline


Bringing It Home

The adage is true − real estate is about location. Occupancy rates and rents can vary significantly from state to state and even within cities. The data is available to help inform the purchase decision, and, for many people, a self-occupied or easily rented property could be a source of cash flow and a hedge against inflation. For others, it may be best to wait for the wall of refinancing to conclude over the next two years to see if there will be even more favorable prices in the future. It comes down to a spreadsheet exercise. We can help with the data; the search for a knowledgeable realtor is up to you.

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