How the changing landscape is impacting office, multifamily and due diligence
In late January, LightBox shared our key takeaways here from a recent economic forecast hosted by CREW Atlanta. In this article, we shared how CNBC chief economist, Dr. Marci Rossell, defined the current state of the economy as being in an “emotional recession” led by fear and declining market confidence, rather than a true recession characterized by a widespread market slowdown.
For the CREW Atlanta event, LightBox invited several Atlanta-based clients to join our table including CRE professionals from leading brokerage firms like Cushman & Wakefield, Lee & Associates and Newmark. Prior to Rossell’s keynote, the tone at the table was a mix of concern over the slower-than-normal fourth quarter and cautious optimism about the year ahead. Here’s what a few of our guests shared with LightBox after the economic forecast:
Cori Nuttal, Principal at Lee & Associates weighed in afterwards, “As an office broker, what struck me the most was Dr. Rossell’s statement that in 10 years’ time, she projects total national office occupancy to only fall by 20%, meaning 80% of our current or projected supply of office space will still be needed.”
If Dr. Rossell’s prediction that employees will likely be using office space an average of three days a week instead of five plays out, employers may not need as much office space, but they will need higher quality workspaces and more collaborative space. It also introduces the challenges for managers to establish new protocols for remote and hybrid employees within workforce; LightBox PRISM 2022 covered this timely topic and offered up strategies and best practices for companies to survive the talent ware and stay competitive here.
Nuttal went on to say, “We all know that the office will never go away, but that hybrid and remote work is fundamentally changing how office space is used. As occupancy rates right now sit well below 80% and sublease space remains at an all-time high, this is encouraging for the next 5-10 years of leasing activity. And she noted that the majority of that decline will take place in markets like New York and San Francisco – so we are feeling quite bullish about the Atlanta market.”
While the office sector faces an uncertain future and has been navigating some early signs of distress, there are some asset classes that have remained relatively strong – including multifamily with rates still rising and the lowest vacancy in years. Matthews Real Estate Investment ServicesTM released its Capital Markets | Market Report on January 18th, 2023 highlighting the multifamily sector’s strong continued transaction activity, as well as national rent growth still at a record high of 5.6%.
Multifamily specialist, Ashlyn Laney, an associate in Matthews’ Atlanta office shared with LightBox how Dr. Rossell’s forecast improved her outlook on the economy citing that she was “reminded of economic fundamentals in plain terms – recognizing that preemptive actions of investors based on overall market sentiment will help dictate how the Fed responds.” While the economic softening is not ideal within the CRE industry, she believes “it’s a good time to think positively” with inflation having peaked at 9% in June of 2022, and the anticipation of rates approaching stability within the next falling within the next 6 months. She notes that plenty of multifamily investors are eager to acquire more properties, but it’s a matter of getting the numbers to pencil with the new debt environment while bridging the bid/price gap to make the deals work.
The inflation peak also has Alan Agadoni, senior vice president for LightBox’s consulting and engineering segment convinced that environmental due diligence customers will see a turnaround sooner rather than later this year. Alan stated that “Dr. Rossell made a convincing case that the current CRE transaction slowdown is a result of the industry’s high dependence on interest rates rather than a broad-based recession.”
Given the slowdown, many marketing professionals within the CRE industry have been challenged with reassessing their marketing strategies under the constraints of tighter budgets. Our clients understand the value of martech tools more than ever- it enables them and empowers their clients, who are their brokers, to get data faster and reach the right audiences. A downturn only makes having technology solutions as a resource more important than ever – ensuring that you’re leveraging all of a product’s capabilities is critical for operating efficiently and successfully within a challenging market.
Moving forward, all eyes are on the Fed for clarity on whether it will assume a less hawkish position on future interest rate increases and thaw the slowdown in lending and transaction activity that characterized the latter quarters of 2022. According to Dianne Crocker, Principal Analyst at LightBox, the news on February 1st from the Fed’s first FOMC meeting of the year was very telling. “By raising rates by only a modest 25 bps, Chairman Powell sent a reassuring sign to the market that the drastic hikes of last year may be in the rearview mirror. While he left the door open for future increases pending inflation reports, this could be the year’s first sign of clarity that Dr. Rossell referenced, which could incentivize capital to move back onto the playing field,” Crocker noted. Watch the outcome of the next FOMC meeting in late March for news of whether the Fed holds the line with another 25 bps or adopts a more aggressive stance.