Even if you’re a residential REALTOR®, it’s not a bad idea to keep an eye on the commercial market. As part of the digital summit held by the National Association of REALTORS® (NAR), Chief Economist Lawrence Yun suggested that the commercial market’s losses could be the gain of the residential market. Yun noted that the ongoing imbalance of supply and demand comes down to low construction of new homes.
“If mortgage rate go down, meaningfully, and the buyers return, we could again encounter another housing shortage unless we really ramp up production or possibly even convert some of the empty commercial buildings, office buildings, disused office buildings into residential units through some tax credit or government subsidy.”
The summit consisted of three successive panels discussing three major topics: residential real estate, commercial real estate and demographic trends.
The commercial segment was moderated by Nadia Evangelou, NAR’s senior economist and director of Real Estate Research. Panelists included KC Conway, chief economist of the CCIM Institute; Igor Popov, Ph.D., chief economist of ApartmentList.com; Jay Parson, head of Economics & Industry Principals for RealPage; and Jessica Morin, research director at CBRE.
Morin kicked off the panel with a summation of the office space market. She painted a picture of reticence and contraction, driven by both cost concerns (interest rates/inflation) and behavioral ones (the shift to remote work, which is looking more and more permanent).
“Companies entering cost containment mode one of the first things they’re going to look at is underutilized real estate space,” said Morin. “Many organizations are going to be reviewing their real estate portfolios to ensure they’re the most efficient.”
Morin noted that office space leases are long-term ones, so employers are tracking not only their own internal projections, but also patterns of what work will look like in the near future. Conway likewise predicted, “Remote work will probably be to commercial what e-commerce was to big box retail.”
Morin warned that “occupiers could cut more space than is necessary,” but believes this could lead to a quality over quantity mindset. Companies may be leasing less office space in the age of remote work, but they’ll be looking for high-quality spaces to lure employees into the office. Such spaces would be, according to Morin, ones near local amenities with in-house features like open meeting spaces and located in areas that aren’t only desirable, but accessible.
REALTORS® know how important commute times are to homebuyers. Now that workers have greater flexibility, employers are taking note, too. Morin, citing surveys, said that, “Employees want less than a 30-minute commute to their office and that time sensitivity is only going to increase.”
Looking toward individual renters, Popov offered concurring information, noting that even increased inventory hasn’t generated an uptick in demand. Parson, for his money, feels that demand is constrained not by hard economic factors, but rather, consumer behavior: “ not an affordability issue. It’s not a job issue. What’s going on? A lack of household formation that stems from low consumer confidence.” He, in particular, pointed out how there was no surge in apartment demand from college graduates in the summer of 2022, which is highly atypical.
Parson predicted that this low-demand, high-vacancy environment will shift the balance of power to renters come 2023. Where will they be renting when that happens? Popov noted previously high-rent markets in the Sun Belt, such as Phoenix, Arizona, have dropped while Midwest locales like St. Louis, Missouri, have risen from low-renting markets to high-rent ones.
Discussing the industrial sector, Conway noted ongoing reorganization of the supply chain, with an overall move from the West to the East and the South. Conway highlighted New York City; Savannah, Georgia; and Charleston, South Carolina, as blossoming areas. Greater economic activity in these areas could attract buyers and bolster the residential market.
Parson further cautioned against viewing buying and renting as in competition versus a correlative rising tide of housing demand. Nothing happens in a vacuum, after all.
For more information, including the recording of the summit, click here.
