Is commercial real estate on the brink of collapse? Find out in this video, as we explore factors fueling this downturn, examine its implications for investors, and most importantly, identify opportunities that you can leverage.
Commercial Real Estate Collapse
The commercial real estate sector is teetering on the edge of collapse. This issue is unfolding rapidly across the country, and significant discounts on property sales illustrate just how dramatic the correction is. In my hometown alone, a 20-story office tower recently sold for over a 50% discount. Similarly, a once $90 million building in downtown Chicago was sold for just $20 million—a staggering 78% discount. These shocking figures are not isolated events but rather symptomatic of a broader trend. Office buildings are grappling with historically high vacancy rates, retail spaces are floundering, and the hospitality sector faces its own challenges. So, what is causing the downturn in certain sectors of the commercial real estate market? What are the factors fueling the collapse?
Factors Fueling the Collapse
There are five factors driving the downturn in commercial real estate:
#1: Decreased Demand for Office Space
The first factor that’s driving the downturn in commercial real estate is the decreased demand for office space. With the rise of remote work, many companies no longer require extensive office spaces. Our own commercial real estate mentoring students, for instance, often work remotely, which gives them more flexibility to pursue commercial real estate. This small sampling of our students working from home is part of a bigger paradigm shift that has significantly reduced the need for traditional office space.
#2: High Interest Rates
The sharp rise in interest rates over the past few years is also fueling the collapse. Buildings that once generated healthy cash flow are now struggling because the cost of financing has doubled. This has stalled new purchases, as well as refinances because commercial loans come due in five, seven, or ten years. And because of today’s high interest rates, the mortgage payment now exceeds the income, leading property owners to often return their properties to the bank. That is a sure sign of extreme distress for this commercial asset.
# 3: Impact of Online Shopping
Online shopping continues to disrupt retail. Recently I was standing in the food court of a mall speaking with the landlord. I asked him how the business was doing, and he responded with, “Look around, what do you see?” I looked around and said, “I see people walking around”, to which he replied, “Are they carrying anything?” It was then that I realized they weren’t and he said, “That’s the problem.” Malls, once bustling with shoppers, are now frequented more for their food courts and community spaces than for their stores. So, online shopping is causing this collapse as well to retail centers.
#4: Lower Property Tax Revenue
The final factor fueling the collapse is lower property tax revenue due to decreased values. For example, a building valued at $90 million reassessed to $20 million dramatically reduces the city’s tax intake, and this drop in property values is widespread over the entire city.
Impact on Investors
What does this mean for investors like you? Well, despite the seeming gloom, there exists a silver lining for savvy investors. Here are some reasons to stay optimistic about office and retail commercial real estate:
Office and Retail
Not all office and retail spaces will become obsolete. This market shift is forcing retail centers to reevaluate how they use their space. Many will be bought at discounts, refurbished, and repurposed. We have already seen instances where former department stores like Sears have been converted into fun and recreation centers and are thriving.
Secondly, some of these buildings will be converted into affordable housing. For instance, New York has slated 46 non-performing office buildings that they are untapped to convert into affordable housing.
The third shift in office is the demand from emerging technologies. Companies specializing in new technologies, such as artificial intelligence, require collaborative work environments. In my hometown, these AI firms are increasingly occupying office spaces, providing a fresh demand.
Market Reset
As you can see, the market is adapting and adjusting, and that is crucial when you have a market collapse. In my opinion, the commercial real estate market is undergoing a reset that may last for several years. This restructuring is a healthy, long-term adjustment that will eventually stabilize the industry.
However, the commercial real estate market isn’t just office and retail. In fact, office and retail only make up a small part of the market. Sectors like multifamily, mobile home parks, storage units, and industrial spaces are performing well. And though office and retail spaces face significant challenges, these specific sectors offer promising investment opportunities.
Buying Opportunities in the Market
The commercial real estate collapse is fueled by decreased demand for commercial space, high interest rates, and online shopping affecting retail and shopping centers. So, where are the opportunities for investors like you? In the universal law of cause and effect; the factors fueling the collapse are creating opportunities for investors.
A recent Redfin article states, that one in six renters stay renters for more than 10 years, and that has increased year over year for the past few years. Moreover, 40% of U.S. renters stay renters for four years, and that number is increasing as well. High interest rates are pricing most renters out of the market resulting in more renters, which boosts demand for multifamily housing and mobile home parks. And as people continue to rent, they need additional storage. Multifamily, mobile home parks, storage, industrial and flex space: these properties are still strong and are where the opportunities are for investors.
Real-World Examples
Here are two recent success stories from our mentoring program:
- Commercial Hacking an Office Building: One of our students, Will, purchased an office building. By moving his consulting business into a portion of the building and leasing the remaining space, he ensured that renters covered all expenses, and he generates cash flow. How did he get such a good deal? First, he came to us for help. We guided him through the entire deal from how to find and negotiate the deal, to how to efficiently manage the property. But another aspect was this idea of cause and effect. The owner was distressed and it presented an opportunity for Will.
- Upcoming Property Closings: Next week, we have two closings: a mom-and-pop self-storage property and a turnkey multifamily building. Both properties were opportunities due to the distress experienced by the former owners. So, this fuel is creating opportunities for investors if you know where to find them.
Questions or Comments? Text PETER to 833-942-4516.
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