Commercial Real Estate Tells A Tale Of Resilience And Adaptation As It Thrives Despite Challenges

The commercial real estate forecast for the year’s second half remains predominantly upbeat as multifamily, retail and industrial properties maintain strong performance.

However, potential hurdles loom ahead. According to a May 6 report by J.P. Morgan Chase, persistently high interest rates appear to be here to stay, and office vacancies continue to rise.

"On the income side, drivers like rents and vacancies will likely be flat to stable for most property types, with the exception of office," said Victor Calanog, global head of research and strategy at Manulife Investment Management's real estate private markets group. "On the pricing side, it's going to be a landmark year when it comes to price discovery. We're forecasting transaction activity, loan originations and CMBS [commercial mortgage-backed securities] issuance to rise by 25% to 30%, relative to 2023 lows."

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According to Moody’s Analytics CRE, the national office vacancy rate broke the previous record of 19.3% when it hit 19.6% in the fourth quarter of 2023. Calanog said the most desirable office properties in the best locations will likely outperform the rest of the market, a pattern that is likely to continue over the next few years. That means commercial real estate investors must evaluate risks and opportunities for each asset and deal.

Although there is some oversupply of apartments, multifamily properties remain strong because of the constant need for affordable and workforce housing. According to Moody’s, the vacancy rate for Class B and C properties was 4.6% last year, while luxury properties were 6.5% vacant. As a result, some property managers are making concessions.

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Grocery-anchored neighborhood shopping centers in densely populated areas are the star retail performers, and many big-box retailers are capitalizing on the trend by opening smaller stores.

"The move toward smaller concept stores is a key part of retail's evolution," Calanog said. "The best-performing retail properties will have owners and operators who are flexible and willing to adapt to what their most important tenants need."

With e-commerce sales growing to 15.6% of all retail sales, the demand for industrial properties is high. Nearshoring and the need to replace outdated industrial buildings may drive construction and demand for the rest of the year and beyond.

Still, the upcoming presidential election and continuous congressional stalemates may affect consumer confidence and spending, which could increase interest rates. The ongoing wars in Ukraine and the Middle East could also contribute to market volatility and impact the global supply chain.

However, Calanog remains optimistic.

"As long as local and global economic growth remains on track, there's no reason to downgrade forecasts — for now," he said.

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