🙃 The Impact of Rising Rates Across Various Sectors

Good morning,

The impact of rising rates across various sectors; office trends point to a new normal of lower utilization; and CBRE to cut costs as profit drops 56%. Let’s delve into today’s topics.

📈 Market Update

🙃 The Impact of Rising Rates Across Various Sectors

While the entire commercial real estate industry faces headwinds from rapidly rising interest rates, some property types are proving more vulnerable than others in the initial repricing wave. The residential housing market was the first to show signs of slowing amid climbing mortgage rates. Next to feel the effects was the multifamily sector, as demand cooled while supply surged. Office properties face the steepest value declines so far, with prices down over 20%, as vacancy climbs, rents decline and financing dries up. Retail remains active for smaller deals but yields are rising for larger assets. Industrial continues to benefit from tailwinds, but cap rates and financing costs are creeping up. Though industrial is faring best for now, sustained high rates will likely dampen demand across all sectors.

Construction Slows as Costs Rise and Demand Falls:
Amid rapidly increasing construction costs and softening rental demand, the pace of new multifamily housing starts has declined significantly. Permits and starts are down as developers struggle with higher interest rates, building delays, and feasibility challenges. At the same time, deliveries continue to outpace absorption, pushing vacancy rates higher and exerting downward pressure on rents. With the largest pipeline of units since the 1970s soon to come online, the multifamily sector faces a precarious imbalance between elevated supply and weakening demand.

🏢 Office Trends Point to a New Normal of Lower Utilization

Three key trends have emerged in the office market that indicate a reshaped landscape: attendance has stabilized but below pre-pandemic levels, job growth is slowing dramatically, and tenants are signing smaller leases tailored to current needs rather than future growth. With hybrid work solidified, office demand is muted. Employers are hiring cautiously amid economic uncertainty, reducing long-term space needs. And tenants are rightsizing footprints, seeking efficiency versus expansion. While the office sector is stabilizing post-pandemic, utilization rates and leasing volumes look set to remain diminished.

Job Growth Remains Strong:
The largest metro areas continue to drive job creation, accounting for nearly 30% of total US gains over the past year. New York, Dallas, Los Angeles, Houston, and Philadelphia make up the top 5 for absolute job growth. Smaller metros top the list for percentage gains, led by Charleston, SC, Dallas, Huntsville, AL, and Ann Arbor, MI. Though down from pandemic highs, major metros are still outpacing pre-COVID job growth. However, volatility is increasing and the spread between strongest and weakest markets is widening.

📉 CBRE Cuts Costs As Profit Drops 56%

CBRE is cutting $150M in costs and pushing its recovery timeline to late 2024 as sluggish property sales and financing weighed on Q3 revenues and profits. The brokerage saw particular weakness in office and industrial leasing as economic uncertainty persists. To offset challenges, CBRE plans M&A activity once pricing aligns and is partnering with Brookfield's Sera Global to enhance capital capabilities globally. Though tougher conditions are projected to linger, CBRE aims to capitalize on opportunities during the downturn.

✍️ Further Reading

• US Property's Quarterly Price Gains at Odds With Bearish Market (CS)

• Does Strong Growth Fuel Inflation? Fed Debates Whether Old Model Still Applies (WSJ)

• Largest US Single-Family Rental Owner Says It Too Is Having Trouble Finding Houses To Buy (CS)

• Blackstone "Completely" Writes Off Playa District Office Campus (RD)

• It’s Crunch Time for the World’s Most Indebted Property Developer (BBG)

• Upscale Indoor Golf Clubs Woo a New Generation of Social Climbers (BBG)

• Vornado, Blackstone JV Breaks Ground on $350M Film Studio (CPE)

📊 Chart of The Day