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The Outlook for the 2023 Commercial Real Estate Market

by | Jan 12, 2023

Despite the pandemic, the last several years have been profitable for commercial real estate in Boston and the Merrimack Valley. Sales have defied vacancy rates and higher interest rates. Rents, however, have not showed any substantial growth. Also, expenses are up for owners and cutting into profit margins. Will these trends continue? How will real estate compare with other investments going forward?

The Current CRE Market

Brokerage

Green Street Advisors, an international consulting and analytics firm providing insight and intelligence into commercial real estate, indicates that for the past year, their most recent commercial property index shows values down as much as 13% across the board. The last two months of 2022 have recorded over one-half of that decline.

Due to interest rate costs and the potential of safer investments, advantages of real estate investments are lessening. Other factors that have weighed on the commercial market have been the pandemic, price increases, and the supply side delays. In other words, more risk, less return.

The above concerns do not mean that all investors are or should sit on the sidelines. Prices for commercial real estate, in most cases, have been sky high. However, as banks become more concerned with performance, mortgages come due, and tenants balk at renewals or increases – bargains could appear. This type of reaction to a slowing market, however, typically lags.

Leasing

CB Richard Ellis Group’s tracking of office trends shows an improvement from the height of COVID-19, but also reports fall off due to economic conditions.

Some highlights from their report:

  • U.S. office occupiers continued to delay long-term lease commitments amid heightened uncertainty.
  • Tenant requirements climbed to a pandemic-era high, while tenants continued to elect shorter term leases due to uncertainty. Tenants also chose quality and spaces allowing more consultative interaction, to compete with the experience of working from home.
  • Boston, one of the strongest office markets nationally, saw a recent monthly increase in their leasing index. Boston continued to lead the CBRE Pulse markets in office demand recovery.

Our View

We have seen that demand for office space, while moderate, has come back from the pandemic period, especially for small to medium spaces.

Locating properties for investment remains a challenging task. For every owner looking to sell, we have nearly ten times the number of inquiries of those looking for investment property. Many of these would-be buyers are coming out of Boston or other urban markets experiencing extremely high pricing. Both Lowell and Lawrence with their reputation as “developer friendly” communities are encouraging investors to seek properties in the Merrimack Valley. Satisfying this demand, due to the limited numbers of reasonably priced properties, is difficult. A recession could, of course, change this status. Vacancies could increase substantially or refinancing at a higher interest rate could affect balance sheets.

In 2022, Bell Tower Commercial Real Estate Group brokered several sales and leases. Pricing was positive and a good deal of competition was evident.

Notable sales brokered this past year include:

  • 1 Billerica Road in Chelmsford (the historic Fiske House)
  • 1320 Middlesex Street in Lowell (the former Bain Pest building)
  • One Merrimack Street in Lowell
  • Several large residential properties in Lowell, including two to Community Teamwork, Inc. to address affordability and homelessness in Greater Lowell

Conclusion

All markets have cycles. The current cycle will depend, among other factors, on Federal Reserve strategies to control inflation and resulting interest rates, as well as general confidence in both the economy and commercial real estate market.

While in some cases, the yellow flag is up, there remain opportunities in every market. When you are ready to make a move, there is no substitute for market familiarity. This includes local market knowledge including pricing and permitting and property histories. This is where the Bell Tower Commercial Real Estate Group can help. Our focus is your success. Contact us to get started on achieving your goals for 2023.

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