Factors and considerations for the commercial real estate industry in 2022 and beyond
The COVID-19 pandemic created both hesitancy and new opportunities for the commercial real estate market. The shift to full or part-time remote work is generating office space uncertainty amongst employers, but repurposing opportunities for investors. What are the current commercial real estate investment considerations and what does the future look like for the industry?
In our twelfth Sharing Knowledge Series episode, host Kevin Vonderau, chief lending officer at Westfield Bank, is joined by guests Jim Pickard, president, Pickard Commercial Group and Dan Spring, SIOR, president and business director of NAI Spring to discuss the latest trends regarding commercial real estate and what investors need to know now and, in the years to come.
Below are highlights from the conversation with Kevin, Jim, and Dan. To learn more about the factors at play in the industry today and what Jim and Dan anticipate in the future, watch or listen to the full episode here.
The impact of flexible work arrangements
We know that companies are providing flexible work arrangements to their employees. The pandemic caused many employers to shift their employees from in-person to remote work. While some employers have brought employees back into the office, a significant amount have not or have implemented a hybrid approach.
Our panel looks at the benefits and drawbacks that commercial property owners and investors are currently experiencing:
- Companies benefit from being able to hire remote workers from anywhere, possibly incentivizing some employers to not fully return to the office.
- “What size do we need? What size don’t we need?” These are questions on the minds of many business owners right now. Investors are directly impacted by the uncertainty companies face with the future of their organizational structure and current preference for short term renewals instead of longer-term leases of office space.
- Jim and Dan both note that there is a common perception that demand for office space is down, so investors should stay away right now. They see this as an opportunity for investors to get creative, take advantage of better pricing, and repurpose these properties into alternative uses like, housing space.
- There’s also anticipation that in a year or two, employers will have more clarity as to whether or not they want office space. With office prices down currently, it may make sense to invest now ahead of the anticipated rise in demand in the near future.
- Instead of seeking traditional, siloed office spaces, employers are wanting more open and creative spaces to better accommodate employees. However, the rise in construction costs is delaying renovations.
Benefits of investing in commercial real estate
Our guests look at the reasons why investing in commercial real estate makes sense right now. We’re seeing record low interest rates, depreciation of property values and appreciation with low rates, principal reduction (over time, what you bought gets more valuable), and an internal rate of return around 19 to 25 percent.
The panel then discusses joining a real estate investment trust (REIT). A REIT is a large organization that has a lot of capital available to invest. REITs can afford smaller margins of return on their investments than smaller organizations or individuals typically can. Becoming involved in a REIT allows you to be a buyer and seller in the real estate market.
Impacts of federal stimulus
Federal stimulus dollars that have entered the market since the pandemic have had on-going effects. Liquidity is high across the country, and this had made the commercial real estate markets highly competitive. “The competition’s become so stiff, that it’s just chased a lot of potential buyers away,” Jim points out.
Jim also notes that right now, patience is key for investors. There are a lot of investors who don’t want to put any more money in the market yet. These investors are likely waiting another couple of years before they start investing more.
Location, location, location
Location is a key factor in real estate investment and development. From a national perspective, the relatively low capitalization rate in the Midwest is driving investment from the East and West Coasts, Dan mentions, particularly for industrial parks and multi-family housing. Even with interest rate changes, don’t expect this to change thanks to the capitalization rates.
E-commerce impact and looking ahead
There’s no doubt e-commerce has had a large and positive impact on the market. Regarding industrial warehouse spaces, look no further than what Amazon is doing. Large industrial spaces are being built all around the country. Dan says, “a lot of people think retail has been hurt, but retail last November was up 14 percent over 2019.” While brick and mortar has been doing well, e-commerce has been chipping away and we should expect that to continue in the coming years.
What can we expect the real estate market to look like five or ten years down the road? While nobody has a crystal ball, Jim and Dan agree that it will likely be blossoming as office space turns the trend around. There’s high demand for manufacturing space and development is being constrained by the high costs of construction. We should expect that offices will be repurposed, and new developments will be made to fill this void.
