Technically speaking, the National Realtors Association (NAR) stated that it anticipates a "slight fall in pricing" in the commercial real estate market in 2023.
Lawrence Yun, the chief economist at NAR, stated over the weekend that "we are starting to see some fall in commercial appraisal values" nationally.
In particular, for those who need to refinance their properties, he continued, "Cap rates just cannot match up with increasing borrowing costs." However, many markets are seeing prices supported by solid job growth.
The capitalization speed, also known as the cap rate, is used to estimate the expected rate of return for any property, including residential and commercial ones. The cap rate is determined by dividing a property's net income by its asset value.
According to Yun, the recent rapid spike in interest rates has driven up borrowing costs, increased cap rates, and thus driven down property values. In many cities, there are more office openings now because people prefer remote work, he continued. For example, he pointed out that San Francisco had a 6% office vacancy rate before the epidemic. Now, it exceeds 15%.
According to Green Street's index of commercial property prices, rising rates have caused them to decline by 13% from their peak this year.
According to a statement from Peter Rothemund, co-head of strategic research at Green Street, higher yields on Treasury bonds result in higher cap rates. Prices for offices decreased by 17.5%, the business reported in its report. And despite the size of the price decrease, he continued, "I don't think we're out of the woods." Property values will likely decline if the 10-year note remains above 4%.
Even though some employers, like Elon Musk, are attempting to reintegrate their staff, the NAR predicted that it would be unlikely for things to return to normal in the workplace entirely.
According to Matt Vance, senior director, America's head of multifamily research, and senior economist for CBRE, employees will spend 25% to 35% less time at work than before the pandemic.
He calculated that this is about a day or a day and a half less spent at work. And according to Vance, "we think this will result in a 15% reduction in the demand for office space per employee."
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