Today’s current economy brings with it many nuances of various markets, and the commercial real estate space is no exception. It’s a market that has been significantly impacted by the global economic climate in recent years, leading experts to believe a so-called “doom loop” is a looming concern (Dryer).
While the commercial real estate market has seen its fair share of change in the past few years, the onset of the global pandemic in 2020 brought a new wave of uncertainty, leading to widespread changes in the way businesses operate. Office spaces stood vacant, retail stores faced challenges as individuals favored online shopping, and restaurants struggled to find a new normal. These changes, among others, had a profound impact on property values and tenancy rates. However, the challenges most associated with the pandemic, such as stay at home orders or occupancy restrictions, haven’t been the only factors influencing where the market is headed.
Rising interest rates and inflation are no stranger to commercial property buyers, however with trillions of dollars of corporate debt maturing over the next three years that will have to be refinanced, companies will find themselves paying 8-9% interest rates instead of the previous 1-2% (Jeff). Between newfound high vacancies and record-breaking interest rates, owners have been forced to increase their rents to offset these changes. In certain markets this may cause city property taxes to decline with the value of their office districts, prompting the previously mentioned “doom loop” – defined as “the downward double-helix of revenue-strapped public services and diminished urban activity, each worsening the other” (Grabar).
While this possibility varies widely by city, it’s safe to say that no one wants to see a “doom loop” lead to an increase of “zombie” buildings in once flourishing business districts. One Forbes article points out that it’s easy to associate commercial real estate with just office buildings, however it also includes shopping malls, grocery stores, labs, doctors’ offices, storage facilities, manufacturing, data centers, hospitals, restaurants and much more (Dryer). This leads property owners to the idea of repurposing existing buildings, such as offices, to support new types of businesses. “Maybe citizens aren’t used to public libraries, DMVs, schools, community centers or churches in high-rises. But why shouldn’t that work?” (Dryer)
Believe it or not, climate change may also play a role in further stressing the commercial real estate market. It turns out that insurance costs are rapidly increasing across the country, and an August Moody’s report suggests a link to climate change. For example, in Denver, where wildfires have been prevalent the past few years, the cost of insurance increased 9%. And it’s not just costs that are increasing. Many companies are finding it hard to secure sufficient insurance at acceptable terms, leaving them without enough insurance to cover them in the event of climate-related extreme weather events (Worland).
In conclusion, the commercial real estate market stands at a crossroads, influenced by a complex web of economic, societal, and environmental factors. The tumultuous events of recent years, including the global pandemic, rising interest rates, and inflation, have posed significant challenges to property owners and tenants alike. The looming idea of the “doom loop,” where declining revenues and urban activity feed off each other, serves as a stark warning. However, this adversity has also ignited innovation and adaptability within the industry, encouraging property owners to repurpose their spaces to meet changing demands.
Moreover, the unexpected influence of climate change on insurance costs and availability adds another layer of uncertainty to the landscape. As we navigate these evolving dynamics, the commercial real estate market must remain resilient and open to transformation, recognizing that its future will be shaped by a multitude of factors. Only time will reveal the true extent of these influences on the industry, but proactive and strategic responses will be essential in charting a successful course forward.
Worland, Justin. “Commercial Real Estate Is in Trouble. Climate Change Is Part of the Problem.” Time, 17 Aug. 2023, time.com/6306005/climate-change-insurance-costs-commercial-real-estate/.
Dryer, Trevor. “Council Post: Three Questions That Could Make or Break the Commercial Real Estate Market—and Cities’ Net-Zero Goals.” Forbes, 14 July 2023, www.forbes.com/sites/forbestechcouncil/2023/07/14/three-questions-that-could-make-or-break-the-commercial-real-estate-market-and-cities-net-zero-goals/?sh=19c3245f1add.
Jeff, Remsburg. “MSN.” Www.msn.com, 2023, www.msn.com/en-us/money/realestate/a-category-5-hurricane-in-commercial-real-estate/ar-AA1eiRHu.
Grabar, Henry. “The Ticking Time Bomb in America’s Downtowns.” Slate, 26 May 2023, slate.com/business/2023/05/downtown-real-estate-office-rent-vacancies-debt-commercial-reuse-conversions.html.