Return to School, Return to Work: What’s Next for Commercial Real Estate? – by Shelly Branscom

August – back to school.                 

Many families are either preparing to head back to school or have already started school.  Where did the last six weeks go?  I know the transition from summer to back to school can feel quite jolting!  Here are some quick tips:

• Routine – creating a functional routine that works for you and your children can be a game changer. Establishing bedtime, wake up time and preparations such as pre-packing lunches and selecting tomorrows clothing can all be beneficial and reduce anxiety.
• Connect – connecting with friends by calling parents from last year’s class and finding out which children will be in this year’s class can also reduce anxiety. Another way to connect is creating a positive atmosphere for your child at the end of the school day.  Greet them with positive statements vs questions. 
• Play – the power of getting outside to play for even 30 minutes can make a huge difference after sitting and learning in a classroom all day. Once the pent up energy is burned off, then hit the homework.
• Fun – the more you can infuse fun into your child’s learning, the deeper connection you will create with them. After all at the end of the day, our children just want to be kids.  Then, take the time to chat about today’s events and tomorrow’s plans. 

We truly hope you have a great start to the school year!!!

While our children are going back to school, let’s take a look at some challenges impacting commercial real estate for the balance of 2022. 

With the recent Federal Reserve’s interest rate hikes, the cost of debt will certainly affect investors’ bottom line.  That said, our current borrowing power is STILL VERY LOW!   Do you remember when interest rates were in the double digits?  We are far from that today.   Real estate is still for sale and there are still some very good deals available.  As asset pricing adjusts to the new financing norms, sellers are coming to grips with the current asset pricing versus what they thought they could get just 90 days ago. 

As markets continue to search for price stabilization, expect to see shorter-term leases, reduced capital improvements and negotiating leverage continue to tip to tenants.  Vacancies best suited to be used in “as-is” condition will lease first.  Some Landlords will do minor improvements upfront to be more competitive.  Individual markets perform at their own pace.  According to Moss Adams Real Estate Advisory “we haven’t reached the bottom yet so expect this to continue until there’s a turning point.”

It should be noted Return to Work is real.  The office sector has been anxious, in part, because of the conversation and the confusion about what occupancy is going to look like and what hybrid is going to look like.  The Reality is the CEO’s are committed to the office and companies have to be in the office at some point.  There’s less hoteling than one might think.  Office leasing in Albuquerque is currently doing well, especially in those buildings where Landlords have continued to upgrade finishes throughout their building. 

While central banks attempt to cool off overheated sectors of product, broad-based tenant demand will likely step down a notch because monetary policies are blunt instruments that don’t distinguish well between sectors.  Just about every expense category associated with operating a property will experience upward pressure making net leased sale opportunities most attractive.

Inflation may be more supportive of tightening cap rates as pricing adjusts in the downward direction.  The Commercial Real Estate sector is “moderately well – positioned” to face prolonged inflation, according to one industry watcher, thanks to what he calls its “demonstrated ability to protect (and expand) profit margins in inflationary periods.” Price discovery and investment activity will likely decrease amid higher costs and tighter credit availability according to Omar Eltorai, director of research at Altus Group.  However, he notes that lease structures allowing owners/operators to capture the upside of inflation, as well continued strong demand for commercial assets will help keep CRE operating performance steady even as inflation rises.

In conclusion the second half of 2022 will be challenging given how rapidly conditions are changing as volatility in the 10 year Treasure yield is likely to persist and that every piece of news is a mixed blessing.  Leasing will remain strong as CEO’s continue to bring workers back to the office.  What Commercial Real Estate moves will you make in 2022?  Now is the time.  Although interest rates, construction costs and operating expenses are on the rise, there are still some profitable CRE deals available.  

Shelly Branscom, CCIM is an NAI SunVista commercial real estate specialist who provides substantial long-term strategies and business planning services to her clients.  She prides herself on thinking outside the box, enabling her to contribute unique solutions and outcomes specific to each of her clients.  Learn more about Shelly and her listings.   

NAI SunVista is a full-service commercial real estate company serving New Mexico since 1996. The company is a dynamic commercial real estate firm offering best-in-class real estate services in brokerage, property management, asset management, business brokerage and development services.