The Discussion: Navigating the Mid-Year Outlook in Commercial Real Estate; Performance Indicators , Transaction Volume, Financing
In a recent episode of “America’s Commercial Real Estate Show,” the host welcomed Tom LaSalvia, Head of CRE Economics at Moody’s Analytics, to discuss the mid-year outlook for the commercial real estate (CRE) market. The conversation covered a range of topics, including financing, interest rates, economic trends, and the impact on different sectors within the industry.
It’s important to note that while the discussion provides a national perspective on commercial real estate, specific market conditions, such as those in Miami, may exhibit variations where certain elements discussed could apply differently or even not at all for the Miami / South Florida commercial property sector.
Financing and Interest Rates:
The discussion kicked off with a focus on the financing landscape and the significant increase in interest rates by the Federal Reserve (Fed) over the past 15 months. LaSalvia acknowledged the 500 basis points rise in interest rates and highlighted the potential impact on market valuations across various sectors. The conversation delved into Fed Chairman Jerome Powell’s stance on inflation and the uncertainty surrounding future interest rate hikes.
LaSalvia provided insights into the challenges faced by smaller and mid-sized financial institutions, emphasizing the competition for a deposit base. He discussed the implications of rising delinquencies on the banking sector and expressed concerns about the tight credit environment. The conversation touched on Powell’s statements about the terminal fed funds rate and the delicate balance between tough talk on inflation and potential adjustments based on economic indicators.
Outlook on Banks and Lending:
LaSalvia projected a tight lending environment, citing concerns about credit tightening due to lingering issues from previous months. He highlighted the competition for deposits among smaller banks and the impact on the overall banking landscape. The discussion emphasized the need for caution in an environment where depositors may shift funds to larger banks, affecting smaller institutions.
Despite the challenges, LaSalvia also mentioned positive signs in the housing market, with permits and housing starts increasing. He suggested that the acceptance of higher interest rates might indicate a shift in mindset within the industry.
Commercial Real Estate Sectors Overview:
The conversation then shifted to an overview of different commercial real estate sectors, starting with the industrial sector. LaSalvia acknowledged a deceleration in the industrial sector but emphasized the continued influence of e-commerce, logistics network changes, and reshoring efforts.
The discussion moved to the retail sector, where LaSalvia challenged the notion of retail dying, pointing out thriving malls with increased foot traffic. He highlighted the emergence of mixed-use developments that include residential, office, and experiential retail components, signaling a shift in the retail landscape.
Multi-family housing was discussed as a long-term darling, with LaSalvia highlighting the need for shelter and potential developments in the class BC housing space. He also addressed the challenges of lease-up activity in the multi-family sector amid record completions and changing consumer behavior.
The conversation explored the dynamics of the office market, acknowledging the impact of remote work on employee preferences. LaSalvia discussed the potential return to office movements driven by concerns about lost productivity, innovation, and team building. He emphasized the evolving nature of office demand, with a focus on location-specific factors.
Final Thoughts and Outlook:
LaSalvia concluded the discussion by expressing confidence in the resilience of the commercial real estate industry. While acknowledging potential challenges and a transitional period, he highlighted the strong belief in tangible, income-producing assets. The mid-year outlook suggested a shift in equilibrium rather than a sudden decline, with opportunities for investors and a positive long-term view of the industry.
Conclusion:
The conversation between the host and Tom LaSalvia provided a comprehensive overview of the mid-year outlook for the commercial real estate market. From financing challenges to sector-specific trends, the discussion offered valuable insights for industry professionals navigating the dynamic landscape of commercial real estate in 2023.