Is A Real Estate Bloodbath Coming? Insights and Potential Impacts
Is a real estate bloodbath coming? Barbara Corcoran, a real estate investor and a Shark Tank personality, recently stated that we are likely to experience a bit of a real estate bloodbath before this thing gets better. It's important to note that she is specifically referring to commercial real estate, not residential properties. The state of commercial real estate across the country is in significant trouble.
A Substantial Drop For Commercial But Not Residential
Barbara further explained that she believes we may witness a substantial 40% drop in commercial real estate values before they stabilize. I think she may be right, particularly on a national scale. However, locally, it is unlikely that we will see anywhere near a 40% decline. I have talked to a local commercial real estate agent and they did say demand has dropped in the local Huntsville, Alabama market but we are very much insulated versus a lot of some of the bigger cities that have huge high-rise buildings with a lot of those are just now sitting vacant.
You may wonder, how did we reach a situation where commercial real estate experiences a significant decline while residential properties remain unaffected? Well, much of it can be attributed to the impact of COVID. When the pandemic hit, many individuals were required to work remotely, and a considerable number of employees and team members have chosen to continue working from home. As businesses approach the time to renew their leases, they are opting not to do so, resulting in reduced demand compared to the pre-COVID period and that really has a trickle-down effect.
If there is a 50-story commercial building with a significant portion remaining vacant, it not only impacts the building itself but also has repercussions on the surrounding commercial spaces that cater to the building, such as restaurants, shops, and other service-oriented businesses.
Inflation, Interest Rates, & Loans
Another factor we are observing created by COVID is the substantial amount of money printed during this time has led to inflation. The Federal Reserve is intervening by increasing interest rates and as these interest rates rise, they also influence the demand for commercial properties. Commercial real estate is typically sought after by investors who consider capitalization rates (cap rates) as a crucial factor in their investment decisions. As interest rates go up, investors want to see a higher cap rate to be able to justify the higher interest rate for that property to simply cash flow.
Another critical concern in commercial real estate, and even in multifamily real estate, is the time bomb ticking away. Unlike a single-family home, where you can secure a fixed-rate mortgage for 15 or 30 years, commercial investments involve commercial loans typically with a five-year or seven-year term. Although these loans are typically amortized over 25 or 30 years, they become due after the initial five or seven years. Many of these commercial loans were based on lower interest rates, which will no longer be sustainable once the interest rates reset.
I have read numbers as high as $1.4 trillion worth of commercial loans that are set to become due as early as 2024. This is really going to create that potential commercial real estate bloodbath with this lack of demand that we're going to see in commercial real estate.
It's clear that 2023 is not the ideal time for investing in commercial real estate. However, even if you are not a commercial real estate investor, you may still have real estate goals of your own. If you would like to discuss your goals related to buying, selling, or investing in real estate, we would be happy to sit down with you. Shoot us an email at firstname.lastname@example.org or contact us here.
Posted by Matt Curtis on