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The Federal Reserve went all-in when COVID-19 struck. From March 2020, a 0% interest-rate policy and cheap capital boosted investment in commercial real estate. The average commercial property price rose by 15%. Many of the loans were of a five-year term, and these loans are starting to come due. Some $2 trillion in refinancing will be required over the next two years.
When the Fed aggressively raised interest rates in 2022 and 2023, from 0% to 5.375%, the higher cost of capital killed off commercial investment purchases and erased earlier price gains. Recently, the average commercial price was 10% below the 2019 average.
Despite these challenges, the worst in commercial prices could be over. The job market has been resilient. There are 7 million more workers compared to pre-COVID employment, and wages are up 4.1% year over year.
Consumer spending will help boost the retail sector, which incidentally added very little new supply and is therefore holding at low vacancy rates. Both industrial and multifamily sectors are enjoying solid positive demand for space but are temporarily facing oversupply conditions, which have hurt rent growth. Even the office sector is showing signs of life, especially in the Sun Belt cities.
Most importantly, the Federal Reserve has started its interest rate–cutting cycle. Extra capital will move into commercial real estate, property prices will rebound somewhat, and refinancing—though not necessarily easy—will be much less challenging.
