Shifting Expectations and Realigning to New Realities

IndustrialMixed UseMultifamilyOfficeRetailSpecial Use

November 2023

Cost of capital, lack of office workers, questions about property values, and more are the themes of 2023 and destined to continue in the new year. This will necessitate commercial real estate professionals creating a strategic plan to realign with the realities of today. There are several key themes we see.

Focus on Distressed Real Estate
Private equity firms are looking at the opportunities of distressed real estate, raising funds to acquire properties at a discount, although the when and how of ROI is the question. The Wall Street Journal reported top firms doing this, including Goldman Sachs, Cohen & Steers, EQT Exeter, and BGO (formerly BentallGreenOak). As refinancing options allude owners in trouble, this could be the way out for them, but without recouping their investment.

Contraction of Industrial
The industrial sector boomed throughout the pandemic years, with premiums on vacant land and thriving construction. But for the fifth consecutive quarter the vacancy rate nationwide has pushed up, per Colliers’ Industrial Market Statistics Q3 2023. Despite this, there is 16.1 million square feet under construction in Philadelphia as of September 2023 and new supply is forecast into 2024 until the construction pipeline contracts. In the region asking rent for Philadelphia industrial was $11.10 per square foot, above the record setting average of $9.52.

Repositioning the Office Sector
Per the recently published Emerging Trends in Real Estate 2024 by Urban Land Institute and PwC, long gone is five days in the office. Remote work has upended the demand for office space and altered migration patterns, the housing people want, the activity of downtowns, and more. Beyond office landlords and owners, this impacts the surrounding businesses reliant on office workers. WeWork’s bankruptcy filing adds another disruption to the troubled sector.

The Biden administration just released information and resources designed to convert commercial buildings to residential use, specifically affordable housing centered around transit-oriented development. But given the innate difficulties in converting office to living space, and common zoning and permitting hurdles, this looks to be a well-intentioned yet significant challenge.

Housing Issues
Housing availability and affordability issues, especially for lower-income individuals, will continue. On the multifamily side it is a positive that nationwide rent growth has been relatively flat since peaking in 2022, and some of this can be attributed to the more than 460,000 apartment units scheduled for 2023. However this still does not address the housing crisis for lower-income renters as, in general nationwide, 8 out of 10 new units are high-end construction.

Locally multiple zip codes have seen an increase in new apartment units in the past five years per data from RentCafe. King of Prussia added 1,778 units representing a 42% increase. West of downtown Philadelphia and close to University City is 19104 which saw 1,536 new units in the past five years, representing a 26% increase in the zip code’s supply.

A Reposition
The consensus is interest rates will remain high throughout 2024, however not continue to increase. Per the PwC report, real estate experts do not feel transaction volume will increase with lowered interest rates, but rather ignite as industry professionals become more accustomed and comfortable with higher rates.

Multiple challenges have changed the landscape for the coming year and some sectors will transform significantly. Commercial real estate professionals will need to adjust to these new foundations to benefit and springboard from them.

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