The office space sector will most likely see a strong fourth quarter in 2022 — but the rise in interest rates might put a roadblock in the market’s momentum.
This article was originally published by Allwork.Space.
It’s no secret that the real estate market has been pretty nuts these last few years. Many are wondering what’s to come, and what they can do to set themselves up for financial success or stability — namely commercial real estate (CRE) players.
For them, focusing on the long-term horizon is the best strategy during periods of volatility. Luckily, the CRE market is still looking hot.
Commercial real estate analysts at MyEListing.com recently conducted a report forecasting the future of the CRE market. Their projections found that the CRE market will still be successful as it has been throughout the year so far, but will start to cool off as inflation persists and interest rates steadily rise.
Will CRE prices continue to stay strong in the fourth quarter of this year?
Despite current economic volatility, most properties are continuing to outperform expectations.
So far this year, the market has been extremely lucrative for property owners. Prices have continued to rise exponentially, and demand has remained strong.
Now, interest rates are rising to combat inflation, so housing prices and commercial real estate prices alike are cooling down. This isn’t to say they’re decreasing yet, but the rate at which prices were increasing has halted.
Inflation can also reduce the purchasing power of tenants, which may lead to lower rents and occupancy rates.
Despite this, the CRE market is still predicted to perform well throughout the end of the year.
As an example, American commercial real estate investment volume rose by 10% to $167 billion in the second quarter of this year.
Here’s how higher interest rates will affect CRE
With the Fed rolling out higher interest rates, more expensive financing will be an issue. Higher rates make it more costly and difficult for buyers to finance a purchase, which can lead to lower demand and prices.
Landlords will also suffer as they will have to deal with higher operating costs because they often have adjustable-rate loans on their properties.
Lastly, properties might be valued as lower because they are less attractive to potential investors.
How will office spaces fare in the near future?
The office space sector will most likely see a strong fourth quarter in 2022, as prices rise and vacancy rates fall. But the rise in interest rates might put a roadblock in the market’s momentum.
If inflation continues to increase, it will eat into profits and make it more difficult for landlords to raise rents on business owners who are renting.
Especially lately, workers have been very vocal about their desire to keep their hybrid and work-from-home schedules, which might negatively impact the office space sector.
“Most workers no longer want to be in the office full-time, especially as gas prices increase the cost of commuting. Office tenants are listening to their employees and watching their checkbooks. Many are trying to renegotiate rent and reduce space prior to the expiration of their leases. Others will clearly reduce space and move to higher quality properties as leases turn,” according to Eisner Amper, one of largest accounting, tax and business advisory firms in the U.S. “Despite this, we read a lot about new office leases. Almost all companies need office space, and many of those new leases are companies moving to better quality space.”
CRE industry players cannot ignore the importance of hybrid working, but can find ways to entice workers back into the office
“The war for talent includes new amenities. The labor shortage persists across industries. While the hybrid workplace is here to stay, on-site work can encourage collaboration and is necessary for many occupations,” according to JPMorgan. “Companies are hoping to entice new workers with office amenities like outdoor space, daycare and catering. Although the best amenities vary from office to office, they’re critical to finding and keeping top talent.”
CEO of Integra Realty Resources Anthony Graziano told Allwork.Space that the commercial real estate market changed vastly as restrictions let up.
“Still, many employees are working from home permanently, and companies find that their need for space is much lower than before the pandemic hit. At the same time, we’re also seeing an explosion of people wanting to engage with the real world,” Graziano said. “The increase in foot traffic patterns and places where people frequented changed drastically at the beginning of the pandemic, and they are changing yet again just as drastically now with the creation of new businesses and new in-person demands.”
In the future of work, CRE industry decision-makers can’t ignore the lasting impact of hybrid work on their organization.