Will CRE Prices Drop in Q4 2022?
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
What will happen to commercial real estate prices in Q4 2022? According to our most recent projections, the commercial real estate market in the United States is still expected to see similar success as it has throughout the year so far.
We anticipate the market cooling down amid inflation concerns and interest rate hikes.
Yet, we expect a steady, yet smaller increase in prices per square foot (compared to previous 2022 increases) across the multifamily, retail, office space, and industrial sectors.
How has commercial real estate performed in 2022 so far?
The commercial real estate market has been on fire in 2022. Prices have been rising and the demand for commercial real estate has been strong.
However, there are some signs that the market may cool down in the fourth quarter of 2022. Interest rates are expected to rise after the Fed announced yet another rate hike and inflation is also a concern.
Additionally, the housing market is starting to cool down, which could affect commercial real estate prices.
Despite these concerns, the commercial real estate market is still expected to perform well in Q4 2022.
How is inflation affecting commercial real estate prices?
The recent concerns over inflation (now at 9.1%, a 40-year high) could have a number of effects on commercial real estate prices.
First, inflation generally leads to higher interest rates, which can make it more expensive to finance a purchase or refinance a loan.
Additionally, as prices for goods and services increase, businesses may be less likely to expand their operations or build new facilities.
Finally, inflation can also reduce the purchasing power of tenants, leading to lower rents and occupancy rates.
Despite these potential headwinds, the commercial real estate market is still expected to remain strong in Q4 2022.
Are interest rate hikes affecting commercial real estate prices?
Higher interest rates can negatively affect commercial real estate in a few ways.
- More expensive financing: For one, they make it more expensive for buyers to finance a purchase, which can lead to lower demand and prices.
- Frustrated landlords: Additionally, higher rates can also lead to higher operating costs for landlords, as they often have adjustable-rate loans on their properties.
- Lower property valuations: And finally, higher rates can lead to lower valuations for properties, as they are less attractive to potential investors.
Despite all of this, it’s important to remember that the effects of interest rate hikes can vary depending on the market and the specific property type.
So while we may see some softening in the commercial real estate market in Q4 2022 due to rising rates, it’s not likely to be a significant decrease.
Does the housing market affect commercial real estate?
The housing market also plays a role in commercial real estate, as a strong housing market can lead to more demand for office and retail space.
A saturated housing market may draw more employers to the area, providing job growth and stimulating the local economy.
And, with overvalued primary markets experiencing housing price cooldowns, we may see an influx of new homeowners in the near future.
How will the multifamily sector perform in Q4 2022?
The multifamily sector is predicted to perform strongly in Q4 2022.
Rents are expected to rise, vacancy rates will stay low, and the demand for apartment space amid a still-hot housing market will stay stable.
However, interest rate hikes could put a damper on the market, and inflation could make it difficult for renters to afford rent increases.
The overall outlook for the commercial real estate market in Q4 2022 is positive, but there are some potential risks that could impact the sector.
How will the retail sector perform in Q4 2022?
Overall, the retail sector is expected to perform well in Q4 2022 as the holiday shopping season draws more consumer spending.
While retail sales are expected to see this increase, its growth comes at a slower rate than what we saw in 2021: between 6% and 8%, according to the National Retail Federation.
This rate of growth may be even slower with inflation as high as it is. As a result, discount penetration may be even lower than it was last year come Black Friday and Christmas.
And with the term recession now being thrown around, consumers may be forced into more of a budget-friendly holiday season than they originally anticipated.
How will the office space sector perform in Q4 2022?
The office space sector may see a similar situation to its multifamily cousin: It’s forecast to have a strong fourth quarter in 2022, with prices rising and vacancy rates falling.
The rise in interest rates, however, could put a damper on the market’s momentum.
And if inflation continues to grow, it could eat into profits and make it harder for landlords to raise rents on business owners who are renting.
Despite these potential headwinds, the commercial real estate market is expected to remain healthy in Q4 2022.
How will industrial real estate perform in Q4 2022?
Despite some softening in the industrial real estate market in the second half of 2022, the outlook for Q4 is positive.
Rents are expected to rise as demand for space remains strong, and developers are still building new warehouses and distribution centers.
However, interest rates are expected to rise in Q4, which could put pressure on prices.
Takeaways for Commercial Real Estate Investors
The commercial real estate outlook for the rest of 2022 is still strong, with experts predicting continued growth across multiple sectors.
- Multifamily will stay strong through the end of the year as demand for affordable living space among millennials and other generations stays stable.
- Retail may perform strongly, yet retail sales growth may slow more than it did Q4 2021 due to inflation and small discount penetration.
- Office may also perform strongly, yet interest rate hikes and employee outcries for hybrid and work-from-home schedules may dampen its performance in Q4 2022 and Q1 2023.
- Industrial is expected to perform strongly as new warehouse and distribution development takes place across the country to battle inflation and supply chain disruptions.
Despite concerns about interest rates and inflation, the market is expected to remain strong, with increased demand for office and retail space specifically.
Depending on what happens with the housing market going into Q1 2023, multifamily may take a hit as home prices decline in overvalued primary markets, raising prices in undervalued secondary markets and drawing aspiring homeowners to those areas.
But only time will tell. Do your research, stay diligent, and happy investing.
Methodology
All figures presented in this article are based on MyEListing.com’s commercial real estate listing data in corroboration with other freely available data and information covering the commercial real estate industry.
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