Realtors are turning bearish on commercial real estate.
Well, technically — the National Realtors Association (NAR) said it’s expecting the commercial real-estate market to experience a “slight decline in prices” in 2023.
“Nationwide, we are beginning to see some decline in commercial appraisal values,” Lawrence Yun, chief economist at NAR, said over the weekend.
“Cap rates simply cannot match up with higher borrowing costs, especially among people who need to refinance their properties,” he added. “However, strong job growth is supporting prices in many markets.”
Cap rate refers to the capitalization rate, which is used to calculate the expected rate of return for a property, be it residential or commercial. The cap rate is calculated by dividing a property’s net income by its asset value.
With interest rates rising sharply over the last few months, that’s increased borrowing costs, and in turn forced cap rates up, Yun explained, and pushed property values downwards as a result.
“Offices are the most vulnerable to these price decreases,” Yun said.
“We are seeing a rise in office vacancies in many cities, driven by a preference for remote work,” he added. Before the pandemic, San Francisco saw an office vacancy rate of just 6%, he noted. Now, it’s more than 15%.
According to Green Street’s commercial property-price index, rising rates have pushed property prices down by 13% from a peak this year.
“It’s a simple story: higher yields on Treasury bonds equals higher cap rates,” Peter Rothemund, co-head of strategic research at Green Street, said in a statement.
Offices saw a drop in prices of 17.5%, the company said in its report.
“And as large as the decline in pricing has been, I don’t think we’re out of the woods,” he added. “If the 10-year note stays above 4%, property prices are likely to keep falling.”
And while some bosses like Elon Musk are trying to get people back into the office, it’s unlikely that employees will return fully to the office like the days before the pandemic, the NAR said.
Employees will spend 25% to 35% less time in the office than they did before the pandemic, Matt Vance, senior director and Americas head of multifamily research and senior economist for CBRE, said.
That translates to about a day, to a day and a half less in the office, he estimated. And “we believe this will translate to a 15% reduction in office space demand per employee,” Vance said.
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