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11/16/2022

NAR’s Commercial 2023 Forecast: Small Price Drop
By Kerry Smith

Overall, high interest rates may lead to a nationwide price decline – but that will vary by local market. Strong job growth should support prices in many markets.

ORLANDO, Fla. – Commercial real estate prices may see a slight decrease nationwide in 2023, but strong job growth will continue to drive demand in many markets, according to National Association of Realtors® (NAR) Chief Economist Lawrence Yun.

Yun joined other real estate experts at the recent “2022 NAR NXT, The Realtor Experience” convention in Orlando. The group discussed economic trends and issues affecting the commercial real estate industry.

“Nationwide, we are beginning to see some decline in commercial appraisal values,” Yun said. “Cap rates simply cannot match up with higher borrowing costs, especially among people who need to refinance their properties. However, strong job growth is supporting prices in many markets.”

Yun said that the recent spike in interest rates combined with high borrowing rates forced up cap rates and caused property values to adjust downward.

“Offices are the most vulnerable to these price decreases,” he said. “We’re seeing a rise in office vacancies in many cities, driven by a preference for remote work. San Francisco, for example, saw a 6% office vacancy rate before the pandemic. Now, it’s more than 15%.”

Matt Vance, senior director and America’s head of multifamily research and senior economist for CBRE, estimates that employees will spend 25-35% less time in the office than they did pre-pandemic.

“That’s about a day to a day and a half less in the office,” Vance said. “We believe this will translate to a 15% reduction in office space demand per employee.”

Vance noted that multifamily properties have provided an annual average total return of 8.8% over the last five years. He also said that multifamily offers critical benefits beyond returns.

“It’s easier to place large amounts of capital [in multifamily],” he said. “It’s also the best inflation hedge among these sectors, and it’s been the most stable sector over the past 40 to 50 years.”

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