The residential real estate market is doing better than most had expected after interest rates more than doubled last year. Prices declined nationally each month from July 2022 to January 2023 (although never by more than 1% per month). However, prices came back up 0.2% in February. Ironically, February was the first month that prices dipped year-over-year, interrupting what was a record 131-month run of ever-increasing prices. It’s too early to say, but it appears that despite high rates, the residential market is stabilizing.
It’s not quite so pretty for commercial real estate, particularly office, though.
The Office Recession
Back in October of last year, I noted that “broadly speaking, the outlook for commercial real estate, specifically office buildings, is not great. And large office buildings, in particular, are doing poorly and will have difficulty in the coming years.” The reasons were threefold. First, the pandemic and lockdowns shuttered a lot of businesses, many permanently, and this led to a general deterioration of the existing stock and reduced demand for office space.
Second, work-from-home has become more prevalent in recent years, and Covid only accelerated that. One prominent economist even went so far as to say full-time office work is “dead.” While many companies are mandating employees return to the office, at least part of the time, the increase in work-from-home arrangements has obviously put downward pressure on the demand for office space.
Lastly, there’s been a notable increase in crime in many cities. While the issue of crime predominantly affects retail, it also hinders offices, particularly in downtown areas that employers tend to pay a premium for because of the popularity of those areas. As the popularity declines, so does that premium.
Still, it’s retail (discussed further below) that has been the hardest hit by crime, with many major retailers closing shop in various cities….