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JPMorgan mid-year look at how CRE is performing

The commercial real estate industry has seen its share of economic uncertainty and will likely continue to do so for the remainder of 2023, according to Al Brooks, JPMorgan’s head of commercial real estate. Brooks recently shared his 2023 midyear CRE outlook, which addressed the future of office CRE space, trends across various CRE sectors, proptech and more.

Macroeconomic forces impact CRE

“Geopolitical tensions, market volatility and high inflation will likely remain prominent in the second half of the year, as will other macroeconomic factors,” Brooks noted. He also said that although recent disruptions within the financial industry may have extended the economic uncertainty around CRE, JPMorgan Chase and the banking systems overall remain strong.

“Backed by a fortress balance sheet and diversified deposit franchise, we have a long history of supporting clients through periods of market volatility, and continue to do so,” he said.

Meanwhile, uncertainty also stems from rising interest rates — the Fed has increased rates 10 consecutive times between March 2022 and May 2023. Investors are doing their best to keep up with the rapid increases. Given that a lot of CRE owners currently pay rates less than current levels, there’s been less refinancing activity. Whether rates will go up again is unknown, so investors are currently caught up in all of the industry uncertainty.

How CRE sectors are faring

Retail is finding its way back from the COVID-19 pandemic. While e-commerce makes up about 15 percent of retail, Brooks noted that there are services and experiences that still require in-person visits, such as nail salons, barbershops and sports bars.

The industrial CRE sector saw a boost thanks to online shopping and the “everything-on-demand” economy, but it might now be coming back down to Earth, Brooks said. During the second half of 2022, the vacancy rate for distribution and warehouse space was 4.1 percent — a record low. That kept dropping every quarter since the end of 2020 but increased 10 basis points during the first quarter of this year to 4.2 percent.

As it has been since the COVID-19 pandemic, office CRE’s fate remains unknown. There’s a lot less demand for office space as companies continue to have remote and hybrid work environments. Any office property that has a lease of 10 years or more might have a chance to ride out the market correction. B- and C-class buildings might not be as fortunate — especially properties with shorter leases and that are outside prime locations — if the current environment continues.

Opportunities exist for CRE

There are a number of upcoming opportunities CRE investors can leverage despite the current economic uncertainty, according to Brooks. Proptech can help address one of the industry’s biggest issues—rising costs for energy, labor and raw materials and slowed-down supply chains. Certain digital marketing and smart building tools could help CRE owners become more efficient and reduce costs. Additionally, rent payment technology can save property owners time and shield them from potential fraud.

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