The current economic environment represents a “generational opportunity to acquire commercial real estate assets.” That was a key message from Spencer Levy, CBRE’s Global Client Strategist and Senior Economic Advisor, at NAIOP Maryland’s annual Capital Stack event.
“Now is also the best time to develop new projects,” Levy said. “It is always a good idea to build during the worst time of the market.”
Prices for commercial office assets are currently 30 percent to 50 percent below replacement cost, with Class B products even higher. Despite rising labor and materials costs, a massive shortage of industrial properties remains and now is the ideal time to build that asset category, he said.
For developers who follow that building advice, “two years from now, they will have ready inventory and timed with leasing rebounding from its current lackluster activity,” Levy said. “Three years from now, when I am making this presentation again, everyone in this room will lament not acquiring commercial real estate assets when prices were as low as they are now. The market is tough, but people are still sitting on their hands and there is tremendous dry powder on the sidelines.”
Currently, all eyes are on the Federal Reserve, especially Chairman Jerome Powell, to see if interest rates will flatten or even decline in the near term. Interest rate relief would signal the return of investment sales and leasing activity in the commercial real estate sector, Levy said. Investment sales were down nearly 40 percent in 2023 and most experts expect interest rates to stay elevated a little longer.
“Putting my real estate hat on, I am wishing for a bit of an economic slowdown, so rates will decline,” Levy said. “We are still predicting an extremely shallow and mild recession next year. Although the Fed chairman is the most powerful man in the world, he does not want to make any policy decisions that may appear to influence the next year’s presidential election. His moves, however, will determine whether the commercial real estate industry has a good or lackluster year in 2024.”
During a wide-ranging presentation, Levy and the local CBRE Mid-Atlantic research team also offered insights on the office market, retail trade, and labor challenges.
While investment sales volume is down, the region’s consumer market fundamentals for multifamily housing, like vacancy and rents, remain strong while supply is relatively controlled. CBRE believes the Baltimore region is poised for a rebound when lending thaws.
The office vacancy rate in Baltimore City is approximately 19 percent, although the flight to quality has produced a 10 percent rate for trophy buildings, Research Director Stephanie Jennings said. Mixed-use areas are capturing demand: Harbor East and Harbor Point continue to outperform in Baltimore City, especially with the global headquarters of T. Rowe Price and other marquee tenants moving to that section of downtown.
One characteristic of the local labor market could help bolster the office market. Baltimore City is ranked 17th nationally for the presence of high-tech talent, which is astounding for a mid-market city, and this will help attract new companies, Levy said.
A labor war, however, still exists between management who want workers back in a traditional office setting and employees who prefer hybrid or remote options. To help lure people back, some companies are providing subsidized parking and giving senior executives their private offices back, he said. Tuesday, Wednesday, and Thursday are the most popular days for employees to work in the office. Larger and high-tech companies are faring better in enticing people to the workplace.
The retail sector remains strong. More than $9.8 billion was spent online during Black Friday, signaling an optimistic start to the holiday season, with omnichannel retailers faring particularly well, Levy said. The figure was 7.5 percent higher than the previous year. In Baltimore, Research Analyst Kevin Gold commented retail has also performed well in traditional residential-heavy submarkets, in urban and suburban areas.
American consumers, however, have nearly completely exhausted their excess savings, gathered through COVID-19 stimulus packages. Spending is expected to significantly slow down, especially during the first quarter of 2024, Levy said.