JPMorgan Chase: Plenty of Big Questions for Commercial Real Estate

(San Francisco commercial real estate photo courtesy Casey Horner via Pexels.)

Economic uncertainty remains high for commercial real estate through the rest of 2023, reported JPMorgan Chase & Co., New York.

“There are plenty of big questions, including the interest rate environment and the future of office space,” said JPMorgan Chase & Co. Head of Commercial Real Estate and Commercial Banking Al Brooks in the firm’s 2023 Midyear Commercial Real Estate Outlook. “But there are also positives: multifamily and industrial continue to perform well, and the industry may have underestimated the strength of neighborhood retail.”

Brooks noted the Fed raised interest rates 10 times between March 2022 and May 2023. “Rates have risen at the fastest pace in decades, and it’s taking investors time to adjust,” he said. “Many commercial real estate owners still pay rates lower than current levels, so refinancing activity has slowed. It’s unclear if rates will continue to rise or if the Fed will change course in the second half of the year. This leaves investors with a familiar feeling: uncertainty.”

But except for the office sector, commercial real estate has remained resilient in the first half of 2023, the report said. The national vacancy rate for multifamily assets was just 4.5% at year-end 2022 and dipped to 3.9% in April.

The retail sector has also held up, the report said. “There are still services that favor or even require in-person visits. For example, trips to the nail salon, barbershop and sports bar are still standard,” JPMorgan Chase said.

Fueled by e-commerce and an everything-on-demand economy, the industrial sector has prospered for years. “[But] while the asset class remains healthy, it may be starting to soften,” the report said. The vacancy rate for distribution and warehouse space equaled a record low 4.1% in second-half 2022 but rose 10 basis points in the first quarter to 4.2%.

“Office space is still up in the air,” the report said. “Remote and hybrid work have largely reduced demand for office space. Still, A-class properties are performing well. Office properties with leases of 10 years or more may be able to ride out the market correction. But B- and C-class office buildings–especially those located with shorter leases outside prime locations–face challenges as the workplace evolves.”

JPMorgan Chase will host a Commercial Real Estate Midyear Outlook webinar on June 1.