Economists Have Optimistic Projections For Commercial Properties In 2025
By SCOTT KIMBLER
After years of anxiety about the direction commercial real estate will take, economists say things are looking up for this sector of the market heading into the new year.
“By all generally accepted metrics, the economy is actually doing pretty good,” said Prof. Tom Smith of Emory University Goizueta Business School. “Unemployment is still way below 5%, hovering around 4.3%. Inflation is below 3%. A lot of people are working, and real wages are up.”
Smith acknowledges that the Covid pandemic undeniably changed commercial real estate trends, but points out that moving into 2025 many of the challenges and sudden changes that were witnessed in the market are now showing major improvements as the economy continues to adjust.
“I think it’s wise and more accurate to talk about real estate markets, as in a lot of markets, in that there are several real estate markets. Even for commercial office space,” Smith said. “It’s like an accordion. They are different in different places. The economy is growing rapidly in some places and growing slowly in other places.”
He adds the needs of companies have changed with shifting world conditions and as a result, the needs of commercial properties have changed as well.
“There was a long period of time where companies were having a hard time finding workers,” Smith said. “I think they have adjusted to that reality.”
CRBE’s Global Chief Economist Richard Barkham shares Smith’s optimism and breaks the metrics down even further.
“The market is still adjusting to the sharpest rise in interest rates in 40 years,” Barkham said. “Which began in 2022 but is now easing. Real estate got through the shock with fundamentals (the balance of supply and demand) in relatively good shape. The best single variable that explains that is the vacancy rate. For instance, there was no increase in retail vacancy. The vacancy rate has continued to trend down and is extremely low in the retail sector.”
Barkam said with repurposing and rethinking usage, commercial real estate has begun to become interesting and manageable again to investors.
“I think with interest rates coming down there’s a wave of optimism coming to the investor side of the market. And we are beginning to see a little bit of price recovery in the multi-family and also the industrial sector,” he said.
One sector of the commercial real estate investor market that is seeing a massive boom in production is multi-family housing. This can be seen most clearly in the sunbelt states from Arizona to Georgia and Florida where the population is continuing to grow rapidly.
“We’ve got a real surge in completions of new apartments,” Barkham said. “Maybe 100,000 per quarter for at least the last six quarters and maybe for the next six. I think we have a historically high level of multi-family completions. For a while in 2022 after interest rates first went up, it looked quite dangerous in the multi-family sector because people stopped taking apartments. But, as we moved into 2023 and people realized we were not going to go into a recession and jobs kept getting generated, we saw rates of apartment absorption jump right back up.”
Barkham pointed out that all the new supply being created in the multi-family sector is quickly being absorbed. Part of that is due to a national housing shortage.
“We are fundamentally three to four million single-family homes short in the United States,” Barkham said. “And mortgage rates are high compared to rental rates. All of that demand is going into the multi-family sector.”
Barkam and Smith agree office space continues to be a challenge.
Many believed early in the pandemic as offices were emptying out that there would be a stark rise in conversions of office space to living space. However, zoning and the unexpected costs of redoing plumbing on every floor of every building, along with other barriers, prevented this trend from becoming a boom.
But according to Barkham, there are still progressing trends and reasons for optimism when it comes to office space. He pointed out that they are seeing the same number of leases as there were in 2019.
The difference is company leaders are opting for about 70% of the space they previously leased. They are also choosing newer, more modern buildings for office space.
Prime office space with a mix of amenities located in walkable neighborhoods near shopping and public transportation had lower vacancy rates before the pandemic and that trend is expected to continue.