The combination of the pandemic-induced migration to working from home and higher interest rates has chilled the large office market. Even the recent demands of the Amazon-type warehouse needs have now clashed with interest rate pressures and the high costs of construction.
CoStar News, the reporting arm of the worldwide real estate listing service, this month noted concerns over the repayment of bank loans on commercial properties.
The story reported that Fitch, a major financial rating service expects US commercial real estate loan refinancing delinquencies to lead to “higher commercial mortgage delinquency rates across all major property sectors.” The rate, Fitch stated, “will increase to 4.9% in 2025.” This is a doubling of the current bank default rate, the analytical firm reported.
CBRE, Inc., a large national commercial broker cited the normalization of “working from home” but predicted strength “after a pause in the Boston office market.”
“CBRE forecasts that the overall office vacancy rate will peak at 19.8% by year-end as below-average leasing activity persists and new construction deliveries continue to come to market, albeit at a slower pace.”
The above vacancy rate means that 1 out of every 5 square feet of office space in Boston will be vacant this year with the suburban vacancy rate being higher. Boston is considered a strong commercial market. CBRE suggests that the area and national market will strengthen in 2025 “based on supply and demand issues.”
Better News Locally
Greater Lowell and Lawrence markets include smaller commercial properties and different types of demand. One example is the increased demand for office space in the past two years by non-profit organizations, including healthcare, counseling and job training operations. Additionally, many small businesses were also stabilized by PPP loan programs during the pandemic. Local banks played a leadership role as well, which allowed businesses to sustain operations while awaiting recovery.
“Going forward, we see a demand for quality office properties,” stated Bell Tower Commercial Real Estate Group Principal Fred Faust. “There’s demand for well-located first floor retail space as well.”
Faust cited a repositioned medical space at Riverwalk in Lawrence being subleased for a children’s service agency. Additionally, he noted Bell Tower’s success in leasing multiple smaller office spaces at newly rehabilitated 63 Park Street in Andover. These transactions as well as other successes in Lawrence, North Andover, Chelmsford and Lowell demonstrate that office activity on a smaller scale in such markets remains relatively healthy.
Gary Sidell, President of Bell Tower CRE Group added, “while space can sometimes take more time to lease these days, having thorough market knowledge as to competition can be a big advantage for property owners. For tenants, we present as many good choices as possible in an unbiased way, working hard to develop strong relationships with clients. We are optimistic about 2024 and helping property owners and tenants achieve their goals.”
The lesson of the Lowell and Lawrence commercial real estate markets is that big and impersonal is not positive currency. We continue to see good activity in the smaller commercial property market and look ahead with hope and positivity. Competition leads to better properties as owners respond to market changes and investing in properties offers tenants great options to find suitable locations to launch or grow their businesses.
If buying, selling or leasing commercial property is a priority for 2024, we welcome the opportunity to help you achieve your goals.