I know my audience is comprised of savvy businessmen and women with an interest in investing, so I’ll shoot it to you straight: commercial real estate is experiencing major roadblocks and will have to overcome some challenges this year.
For decades, the CRE market was a reliable investment supported by low interest rates and easy credit. However, in 2023 with rising interest rates, higher cap rates, and declining property valuations (especially in the office and retail sectors), CRE owners will need to hang on and weather the storm.
February was an especially difficult month across the board; the stock market plummeted, residential real estate was down, and commercial real estate deal volume was down 51% year over year. Additionally, prices fell in February with the apartment and retail sectors experiencing the largest decline.
Another concerning factor is that nearly $450 billion in commercial real estate loans are maturing this year, and approximately 60% of them are held by banks. Of these loans, 68% are financed by regional banks where the pressure on liquidity has been especially severe. This means banks will be less likely to give loan modifications and it will be more difficult to get a loan due to tightening lending standards.
This impact on the banking system will in turn directly affect the economy as a whole. Some economists and CRE analysts are already pushing for regulatory changes that would allow for a refinancing program to benefit both lenders and borrowers. Of course, this is challenging in a financial environment where inflation is running rampant.
If there is a silver lining to this situation, it’s that certain sectors are still faring better than others. The multifamily and industrial sectors, especially in certain U.S. markets, are relatively stable. As always, wise investments can be found in any market and an experienced investment advisor like the ones on my team can help guide you through this challenging time.
Justin Langlois, CCIM is a Commercial Real Estate Investment Advisor with Stirling Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.