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NEW YORK – Disruptions in demand during the pandemic have caused disruption in the commercial real estate (CRE) sector, and financial distress can impact the banking sector, local governments’ fiscal models and the entire economy, according to the Brookings Institute.
CRE faces a rise in demand that surpasses the speed at which buildings can be built or renovated. The issue is not just that there is too little or too much space: It is a mismatch between available space, locations with demand and firms with resources, such as community support, access to capital and site control.
During the pandemic, retail was the most stable CRE category with demand increasing since then, but the gap between office supply and demand for space has widened with demand shrinking by 160 million-square-feet since 2019’s first quarter. Demand for industrial space increased the most, but an explosion of supply has led to higher vacancy rates.
Since 2019, retail and industrial values have continued to grow, but office value declined 23.3%, or $740 billion, and multifamily has dropped 6.1% in value, or $300 billion in losses. Despite macroeconomic headwinds, retail rental properties have generated competitive and stable returns, but a market reset is happening in 2024 as malls are closed or adapted. Retail vacancy rates nationally have reached a five-year low point, but at the hyperlocal level it varies widely.
Source: Brookings Institution (08/15/24) Zha, Yilun; Loh, Tracy Hadden
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