Unfortunately, it doesn’t look like the challenges are going away anytime soon. In fact, according to Morgan Stanley, we may be facing a sudden drop in CRE values due to the pandemic-induced onset of remote and hybrid work.
Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management, predicts a major downturn in commercial real estate values – with estimates projecting up to 40% losses from their peak.
“With property prices posting negative year-over-year comparisons and the office vacancy rate nearing a 20-year high, the commercial real estate market is vulnerable to any adverse developments in interest rates or bank lending,” says Shalett. “More than half of the nearly $2.9 trillion in CRE mortgages will be up for refinancing in the next 24 months, and regional banks account for 70 percent to 80 percent of the loans. Even if current rates stay flat, the new lending rates are likely to be 350 to 450 basis points higher.”
As experts in the industry, we must be well-informed and prepared to navigate these uncertain times. At RE/MAX Commercial Advisors Group, we have created a list of the best practices to navigate this drop in the best way possible:
Understanding Why CRE Values are Dropping
Understanding why CRE values are dropping is the first step in navigating this challenge. Simply put, shifting to remote and hybrid work means businesses need less space. Unfortunately, this means supply outweighs demand, and property values are dropping as a result. This, coupled with the fact that consumer habits have changed due to the pandemic, has left many commercial properties sitting empty.
Consider Your Financing Options
As we face these uncertain times, it’s important to consider your financing options. Explore every avenue available to reduce risk and secure your property’s value. If you have a commercial real estate loan coming due, speak to your lender about your options. They may be willing to work with you to adjust your repayment terms, or you may be able to refinance your loan.
Consider Redeveloping Your Property
If you see a decrease in demand for office space, it may be time to consider redeveloping your property. Explore options like converting office space to residential, mixed-use developments, or flexible workspaces that allow for hybrid work. While it may seem daunting, redeveloping your property can help you adapt to the changing market and increase your property’s value.
Focus on Tenant Retention
Another way to navigate this challenging market is to focus on tenant retention. Your current tenants may be facing the same struggles and uncertainty that you are. Work with them to understand their needs and adjust your services accordingly. Offering flexible lease terms, investing in technology to support remote work, and creating safe and comfortable working environments can help to retain your tenants and increase the value of your property.
Stay Informed and Prepared
Finally, as the industry navigates these uncertain times, you must stay informed and prepared. Monitor the market closely, network with industry experts, and be ready to pivot as needed. While these challenges may be difficult, they are not insurmountable. You can survive and thrive in this changing market with the right information and approach.
Commercial property owners must be well-informed and prepared to navigate these uncertain times as we face a steep drop in CRE values. Property owners can reduce risks and secure their property’s value by understanding why values are dropping, considering financing options, redeveloping properties, focusing on tenant retention, and staying informed and prepared.
While these challenges are significant, we have the tools and knowledge to adapt and thrive. Let’s tackle these challenges head-on and come out stronger on the other side.
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