Bill Pastuszek
Looking back at the past year, what factors are impacting the market? What are some signposts that could help commercial real estate (CRE) understand what’s to come? ?How does New England compare to other markets?
First, the F.R.B. The “benchmark” federal funds rate fell to a range of 4.75-5%, a decline of 50 basis points. The Fed’s rate-setting committee said the cuts were made “taking into account the evolution of inflation and the balance of risks.” The interest rate had been in the range of 5.25% to 5.5% for more than a year. The St. Louis Fed reported the federal funds rate at 4.83% in September, after reaching a high of 5.33% earlier this year.
Not long ago, one analyst was quoted as saying, “Things are going to get worse before they get better.” Is now the time for things to improve?
real estate sector. Let’s look at some real estate sectors.
Real estate financing. Commercial real estate financing is closely related to the 10-year Treasury. That rate is currently in the low 3% range, according to FRED. Interest rates peaked at 4.7% in early 2024. Participants in the CMBS universe report that the situation has “de-escalated.” So, overall, will lower lending rates ease the impasse in CRE?Lower interest rates may ease the cash flow strain on existing loans, but interest rates will fall slightly. This will encourage refinancing and, more importantly, purchases.
office. Although there is a lot of optimism in the world, some observers may say that things can only rise from where they are. Office pricing is reportedly still in the ‘discovery’ stage (has it hit rock bottom yet?). The market will adapt by reusing buildings and working with tenants to come up with ways to achieve higher occupancy rates. While rents aren’t falling precipitously, the landlord’s generous concessions may make these deals seem more tenant-friendly than they appear at face value. Clearly, the asset class is still trying to overcome disruption from the coronavirus and the work-from-home era, as well as larger forces that will reduce the need for office space.
drug store. For the past 15 years, most investors and analysts would have cited drugstores leased to major corporations as one of the safest real estate strategies. Recently, Walgreens announced the closure of more than 1,000 stores. Rite Aid has been integrated. CVS is in the process of reducing its portfolio. That seemingly safe environment has recently changed dramatically. The net lease market as a whole is undergoing some changes.
market sentiment. On the other hand, for investors who have been waiting for a turnaround, the latest interest rate cut could be a turning point. High-quality assets have greater attractiveness and may, in some cases, have lower bid-to-ask spreads. Bidding occurs between buyers who are looking at current realities and sellers who have higher expectations.
What about New England? While not immune to prolonged downturns, the fundamentals are healthier and less overbuilt than in more growth-oriented markets. Indeed, the downtown office market is struggling (with signs of adaptation) and retail is considered “constrained.” Slow-growing and sensitive to population and housing growth, New England has never established itself as a leader in retail development.
Although industrial industry has reached its peak, it remains a source of strength for the region’s CRE. A number of developments have been made to restore historically lackluster development. The same applies to apartment complexes. There are a lot of new stocks in the Boston metro, and while there are some ups and downs at the top of the market, the class as a whole remains stable. (This is not the case nationwide.)
Accommodation has rebounded significantly in recent years. Lower debt costs are expected to increase trading activity, while remaining mindful of the vagaries of the economy.
The CoStar index lists Boston as a leading market in several real estate categories.
summary. Don’t get too excited about slightly lower interest rates. Commercial real estate tends to be slow-moving. While interest rate easing increases optimism, buyers and sellers are still seeking agreements, many leases will be repaid and reset, and bankers and investors will be wary of jumping in too soon. Dew. The third quarter of 2024 has been tough, and barring any unforeseen incidents, the news may improve going forward, but all signs point to caution until a clearer path forward. It shows.
Bill Pastuszek, MAI, ASA, MRA Director Shepherd Associates LLC, Needham, MA
