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Analysis: Retail, multifamily shine for CRE, office sector’s struggles continue

Ask someone about the state of the commercial real estate industry, and their answer is likely to be negative. There’s a chance their pessimistic view might be correct, but it depends on what sector of the CRE industry they’re referring to. That’s because while the office CRE sector continues to struggle since the COVID-19 pandemic, retail and multifamily are navigating the rocky landscape, Mortgage Professional America reports.

The combination of unpredictable interest rates and inflation has made it difficult to gauge investor interest in CRE. However, Jamie Woodwell, head of commercial real estate research for the Mortgage Brokers Association, noted uncertainty is selective in how it hits different properties.

“The changes affect different deals, properties and loans in different ways,” Woodwell told MPA. “One property may have no issues or no significant changes going on in relationship to the space market but then some questions are unknown in the equity market in terms of people not being sure where values are and higher rates in the debt market.”

Office CRE’s troubles continue

The office sector has yet to bounce back following the pandemic. While other sectors have seen people return, many companies are continuing their remote work policy, leaving offices vacant and negatively impacting CRE office owners’ rental income.

For example, an 11-story building in downtown San Francisco is currently 30 percent vacant and expected to completely vacant by 2025. It was sold for $40.9 million — a 66 percent discount from the property’s most recent $121 million assessment, according to SFGate. Meanwhile, the office vacancy rate increased to 19.3 percent in the Seattle area, according to JLL. Researchers pointed to bigger tenants leaving their offices to consolidate their CRE footprint. Even strong requests for employees to return to their office hasn’t helped office demand — quarterly leasing volume fell almost 36 percent year-over-year, MPA reports.

Retail paints a brighter picture for the CRE landscape

While office CRE stumbles, the retail sector has come back strong. Woodwell acknowledged that two years ago, CRE investors and lenders were hesitant when it came to retail as an asset class. Today, many of those same parties have started to separate the types of retail they’re comfortable investing with from the types they aren’t.

“(For example), grocery-anchored centers now are highly sought after,” he told MPA.

Multifamily offers another sign of hope for the CRE industry

The multifamily sector has also fared well during this tumultuous time for CRE, MPA reports. Woodwell pointed to new supply coming online, which has impacted rents in markets and created reason for optimism. In regard to loans, the sector is doing well, “depending on when that property was first purchased or last financed.”

“If it was purchased or financed 10 years ago, its value is 160 percent up from where it was 10 years ago,” Woodwell told MPA. “There’s a lot of equity that’s been built into that. If it was purchased recently, it hasn’t seen the same level of appreciation. So again, different properties are in very different situations, depending on their particulars.”

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