Almost no component of the U.S. economy has been spared from the effects of rising inflation. Commercial real estate is no exception as pressures fueled by rising interest rates, supply chain disruptions and the threat of a recession continue.
Industry experts say investors are not panicking but rethinking their short and long-term strategies for growth and investment. Cash-strong entities are better positioned to ride out the current uncertainty, and some property types are expected to be more resilient.
The effects of tight money
The Federal Reserve hiked the base interest rate by 0.75% earlier this month, the largest increase in 28 years. While money is still relatively cheap, borrowing is more expensive than it has been in over a decade.
Real estate has typically served as a hedge against inflation as landlords protect their investments by raising rents. But the current economic environment is anything but typical. With the stock market entering a bear market phase, even deals involving large CRE companies face greater scrutiny by sellers and lenders.
Analysts say many sellers are still trying to match the profits they received prior to the economic downturn. That means buyers must often absorb the increased costs as well as the risks presented by stock market uncertainty and other factors.
Real estate stocks join a downward trend
Few CRE groups have been spared from losses in 2022, including real estate investment trusts. The FTSE Nareit All REITs index, reports a more than 20% decline since the beginning of the year. Losses have been seen regardless of property types, including:
- Regional malls: 37%
- Office specialists: 30%
- Self-storage: 23%
- Healthcare: 13%
The hospitality sector, one of the hardest hit during the pandemic, has fared better than others this year, with losses of only about 6%.
Two property types are expected to do better
While even the most optimistic forecasts for the foreseeable future predict every CRE sector will be impacted, some will likely do better than others. Analysts say multifamily housing and industrial assets, cash-flowing properties, are better positioned.
A slump may be unavoidable, but experts believe the long-term outlook is not so bleak, especially in housing. The U.S. suffers from a housing shortage, and capital is still available for investment. Investors who take advantage of opportunities in resilient properties can prosper during this time of uncertainty.