Commercial real estate industry insights.

Commercial Real Estate Market Outlook

by Chris Roach, MAI, CCIM | Aug 9, 2022

Commercial real estate values are not expected to see significant declines this year despite market concerns over recent and forecasted interest rate hikes, stagflation, and recession fears.

Current market conditions have caused REIT stock prices to decline this year, but direct ownership of commercial real estate is still considered a sound investment for several important reasons.

  • Expectations that CRE investments will perform better than other asset classes (stocks, crypto currencies) during an economic contraction and a period of higher interest rates.
  • The inherent value of real estate in top markets will remain intact long-term, and small price decreases make these assets more attractive to investors.
  • There is continued strong demand for certain CRE sectors, such as healthcare and life sciences, industrial, multifamily, and data centers.
  • Hospitality properties (hotels) are rebounding in a post COVID-19 environment, as more people are traveling to leisure and business destinations.
  • CRE properties are still very appealing to foreign investors who are always seeking high-quality assets.

The direction of capitalization rates varies for CRE markets. For example, cap rates for high-demand markets like industrial and multifamily may show a modest increase in response to forecasted higher interest rates in the coming months. But cap rates for those markets were previously at record lows. Cap rates for other CRE sectors, such as retail, are likely to trend higher but not enough to seriously dampen investor enthusiasm for these properties.

According to a recent GlobeSt report, “CRE lending has continued to expand, as has market activity, and new business seems unlikely to potentially face the same types of surprises as happened in 2020. Furthermore, according to the poll results, retail, hospitality, and restaurants, which faced heavy COVID-19 impact, are faring better than in 2021 and less likely to require defaults or workouts than then.”

The U.S. economy is expected to have a mild recession as higher interest rates temper business and consumer spending. But the economy is expected to stabilize and expand at the end of this year or early next year. Based on those forecasts, CRE owners and investors are hesitant to make rash decisions in selling properties at lower prices. 

The Sun Belt region, particularly Florida and Texas, will continue to show strength in CRE market largely due to the continuation of the population shift trend in this area of the country. Some major urban markets also are expected to deflect the impact of a slowing economy, such as New York City which is considered a top CRE market among domestic and foreign investors.

Commercial real estate serves as safety net for investors during turbulent financial times.