A Tale of Two Sectors: Exploring the Industrial Boom and Office Gloom in Major US Cities
MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
In the last several years, there has been a substantial change in the US real estate market. A startling contrast between the thriving industrial sector and the failing office market has formed as the COVID-19 pandemic`s effects on the commercial real estate landscape continue to take shape. Both investors and property owners have faced opportunities and difficulties as a result of this division. We have examined the cities with the highest discrepancies between the good performance of industrial space and the underperformance of office spaces.
| City | 2022 Ind. Rent Growth | Office Loans at Risk | Outstanding Office Loans |
|---|---|---|---|
| New York | 10.9% | 3rd most at-risk | $16 billion |
| Los Angeles | 6.0% | 14th most at-risk | $16.9 billion |
| Chicago | 5.7% | 11th most at-risk | $11.9 billion |
| Houston | 5.1% | 17th most at-risk | $13.8 billion |
The Office Crisis`s Center Of Gravity Is New York.
Due to its enviable location and substantial demand for office space, the Big Apple has long been a commercial real estate powerhouse. The pandemic, however, has left the city`s office market in shambles. New York is the riskiest metro area in the nation for office property valuations, where there are a whopping $16 billion in commercial real estate (CRE) loans coming due in 2023, a 30% increase from 2022.
The need for office space has drastically decreased as businesses have adapted to remote working arrangements and reduced their physical footprints. Vacancy rates have increased as a result, and property prices have decreased. In contrast, New York`s manufacturing sector has held up well. The need for distribution and fulfillment centers has expanded along with the demand for industrial space as e-commerce has skyrocketed. Investors trying to understand the city`s shifting real estate market can note this stark division between the office and industrial sectors in New York.
Booming Industrial Hub With A Sluggish Office Market: Los Angeles
Another excellent example of a city that is struggling with the dramatic disparity between the industrial and office sectors is Los Angeles. The city has a strong manufacturing base and is well-located on the West Coast, making it a desirable location for industrial investment. The industrial sector in Los Angeles saw a strong 7.2% year-over-year rent gain in 2022.
The Los Angeles office market, however, paints a different picture. Vacancy rates have increased markedly and property values have fallen as businesses have adopted remote work and reduced the size of their offices; however, these values have not dropped enough to reflect the current interest rate environment, and are still carried in some cases at cap rates reflective of 2021`s rate environment. Los Angeles, which has about $16.9 billion in outstanding office loans, is fourteenth in the US for office loan risk. Strategic default has occurred on downtown office properties, most recently by Brookfield. The contrast between the city`s booming industrial sector and its struggling office market should be well-understood by investors.
Navigating The Diverse Real Estate Environment In Chicago
Chicago has been a popular destination for industrial real estate investment due to its strategic midwest geographic position and large transit network. The industrial sector of the city has experienced tremendous expansion, with a 6.3% year-over-year rent growth in 2022.
Furthermore, the requirement for effective supply chain networks and the expansion of e-commerce have both increased demand for warehouse and distribution facilities.
On the other hand, Chicago`s office market has had a difficult time rebounding from the pandemic-induced office property recession. The need for office space has decreased as more businesses switch to hybrid or remote work models. With over $11.9 billion in maturing loans, Chicago ranks as the seventeenth most at-risk metro area for bank office loans. For investors and property owners in the Windy City, the dramatic contrast between the thriving industrial sector and the faltering office market creates a challenging environment.
Houston: A Dichotomy Driven By Energy
The growing divide between the industrial and office sectors has also been observed in Houston, which is well-known for its robust energy sector. The city`s industrial market has benefited from its advantageous position, robust transportation system, and expansion of the manufacturing and petrochemical industries. Rents in Houston`s industrial sector increased by 6.0% in 2022 over the previous year.
On the other hand, the pandemic and the turbulence in the energy industry have had a negative effect on the city`s office market. Businesses have reduced the amount of office space they need, which has resulted in growing vacancy rates and falling property values. With over $13.8 billion in about-to-mature loans, Houston is ranked as the seventeenth riskiest metro location for office loans. Investors attempting to take advantage of Houston`s distinctive real estate dynamics face a difficult environment as a result of this division between the industrial and commercial markets.
Wrap
The contrast between the robust industrial sector and the ailing office market has been more obvious as the commercial real estate landscape continues to change in response to the COVID-19 pandemic`s ongoing consequences. Significant differences between these two asset types have been observed in cities like New York, Los Angeles, Chicago, and Houston, offering both opportunities and difficulties for investors and property owners.
Investors should carefully consider the risks and benefits associated with each sector when making investment decisions in light of these divergent tendencies. This could entail altering investment tactics to concentrate on the expanding industrial market or investigating creative ways to convert underperforming office buildings in order to satisfy the shifting demands of today`s enterprises.
In order to successfully navigate the complicated and ever-changing real estate market in these cities and beyond, the knowledgeable investor will need to grasp the factors that are driving these different patterns. Investors who can successfully spot possibilities within this contradiction will be well-positioned for long-term success as the commercial real estate market continues to adjust to the new normal.
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