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The Commercial Real Estate Outlook for 2024
Tight credit, work-from-home trends, energy-hungry data centers and more color the horizon for commercial real estate as we enter 2024.
By: Winston Rowe and Associates
Cost and Availability of Capital
The primary effect of rate hikes is obvious. The cost of borrowing has increased dramatically and will likely remain high indefinitely. Higher mortgage rates aren't good for any borrower, but can be devastating for CRE investors who borrow heavily and generally need to refinance every three, five or seven years.
The problem is being exacerbated by banks tightening their lending standards or refusing to make CRE loans at all. Federally regulated banks hold virtually all of their reserves in U.S. government bonds. When rates go up the value of bonds goes down. By necessity, banks are being very conservative in making loans. Not only do CRE loans cost more today, but they are harder to find.
The causes of the post-pandemic inflation we've been experiencing are disputed by economists, but the phenomenon is real. The Federal Reserve responded to inflation with rate hikes. The goal of raising rates is to combat rising prices by slowing the economy. Unfortunately, rate hikes, particularly the rapid and dramatic ones we've seen, can push an economy into recession.
In other words, the CRE industry is facing the significant possibility of an economic slowdown in the coming year.
A significant downturn would mean commercial landlords will struggle to fill vacancies and find it difficult, if not impossible, to raise rents.
A prolonged period of low inflation and relative price stability ended abruptly three years ago. After an initial and alarming spike, the inflation rate has since moderated, but it's still too high and overall price levels have been slow in receding.
Commercial property investors are certainly not immune to the effects of inflation. The cost of operating and maintaining a building and providing amenities to tenants is dramatically higher than it was 36 months ago.
Inflation also causes anxiety in individual consumers who are the end-users of CRE. In inflationary times, the commercial property owners suffer as people cut spending which, in turn, causes businesses to delay or cancel expansion plans that otherwise would have included renting real estate.
This article was prepared by Winston Rowe and Associates a national due diligence and consulting firm based in Michigan. They can be contacted at 248-246-2243 or visit them online at https://www.winstonrowe.com
Winston Rowe and Associates