New Opportunities In The Commercial Real Estate Market

The commercial real estate market is a massive market worth over $20 trillion but recent challenges for this market may lead to serious consequences. Rising interest rates and loans coming due is forcing the market to realize that free money is gone. Over $450 billion in loans are due in each of the next 4 years and the federal funds rate has been raised to 4.5% from less than 1% making loans even more expensive.

Another large challenge for the commercial real estate market is the rise of remote work during the pandemic driving down the demand for office space. Employees are spending 25% to 35% less time in the office today as compared to before the pandemic, leading to 15% less office space demand per employee. Office vacancies have started to rise – in the San Francisco area, office vacancies have more than doubled since before the pandemic, from 6% to over 15% in 2022. These rising rates and lowered demand have pushed the overall price of office space down by 17.5%, with an even larger drop of 20% to 30% with an uneven recovery still possible. 

While office space prices may be falling, institutional investors know that commercial real estate as a whole is still very strong. Those who are willing to look may find new opportunities from those who are getting scared by these challenges in the market. Commercial real estate in Manhattan has even grown despite these hardships.

JLL Q3 industrial leasing activity exceeded 1.1 million square feet with a year to date volume of 2.3 million square feet – 44.9% higher than all of 2021 combined. Colliers Manhattan leasing volume grew by 26% to 9.23 million square feet with a year to date leasing volume totaling 24.17 million square feet. This was nearly a 50% increase from the 16.34 million square feet leased during the same period in 2021. Even luxury retail grew in Manhattan as Hermès, Givenchy, and Gucci all acquired new retail spaces. 

There are many types of commercial real estate that show up in all parts of our cities and towns and are each designed with unique features and characteristics. Retail space is one type of commercial real estate, which contains individual, standalone stores or large shopping centers for the sale of general items such as clothing, food, and electronics.

Another type of commercial real estate is hospitality real estate, which includes hotels, motels, and other buildings for lodging and extended stays. Some of these buildings simply have rooms to stay in, while others may have restaurants and other onsite amenities, and others can be attached to large entertainment complexes designed for weeks of stay. Industrial real estate is another type of commercial real estate that are properties used as manufacturing, distribution, or logistics facilities. 

These properties can be massive warehouses upwards of 1 million square feet to be used as a centralized distribution point, while others can be used as small storage or a final product assembly plant. Some of these properties contain office space as well as storage or assembly locations. Office spaces are another type of commercial real estate that are categorized from class A to class D. Class A properties are brand new buildings with the most luxurious spaces in the best locations whereas class d properties need entire remodeling or even demolition.

Finally, special purpose buildings are built with a specific purpose in mind. These buildings include stadiums, amusement parks, self storage facilities, student housing, movie theaters, zoos, bowling alleys, and more. Some properties are mixed use buildings with two or more property types in the same building, such as a multifamily apartment building above a retail shopping center. 

Some commercial real estate professionals save time, money, and effort by selling a business alongside their properties. Selling a business together with property saves time by getting them simultaneously appraised and by closing both sales at the same time, cutting down on lag. This also helps save effort by more easily being able to find financing options that cover both the business and property at once. This also reduces complexity in a deal and adds more privacy, flexibility, and negotiation power when selling a business and property. When selling a business with their properties can also dodge paying certain fees multiple times, such as closing fees and appraisal fees. 

Learn more about how the commercial real estate market might react to these challenges and how selling your business together with its properties today.

Written by Brian Wallace.

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