Investing in commercial office space is a bit trickier and more complex than investing in residential real estate. Many property brokers start by acquiring a residential property and eventually graduate to commercial real estate as they gain more experience.
Is now the right time to look for new commercial office space? You should research some unique aspects of this property management if you’re considering getting into the commercial game.
The Current Economic Situation
We are coming out of a once-in-a-century pandemic that has shaken almost every aspect of the world’s economic systems. Two years of shutdowns and government aid may have been prudent at the time, but we all knew we would all have to pay the price eventually.
That time is now here. We are seeing sky-high inflation, and it does appear very likely that a recession looms on the horizon. Retail stores have trouble stocking shelves, and gas prices are soaring above five bucks a gallon. Manufacturers are short on raw materials and seem hesitant to place orders. Furthermore, global conflict threatens not only the world’s energy supplies but also food supplies.
Realistically we have to acknowledge a recession is likely, and the Federal Reserve is raising interest rates to deal with the problems.
A Look Back in History
So given the current economic situation, is it prudent to invest in full-service real estate right now? Look back in history to the last recession and see what happened in the real estate market.
In 2008 and 2009, the residential real estate market tanked due to lenders improperly underwriting loans which caused housing prices to rise to unprecedented levels, only to come crashing down when the bubble popped and many people could not pay their mortgages.
The current situation is nowhere near that bleak, but there are some parallels. The housing market was turned on its head in 2020 as many people saw their needs change and wished to move to larger homes to facilitate Work From Home (WFH) and social distancing needs. Interest rates were pushed down to historically low levels by the Federal Reserve as a way to allow the economy to deal with the COVID shutdowns.
Now that the pandemic is over and rates are rising, the housing market will come back down to healthier levels, if not crash altogether. Let’s look back to 2008 and 2009. The commercial market fared much better than the residential market. We know from history that this is often the case. The commercial market has always been safer and significantly less volatile than the housing market.
Today’s Unique Situation
Today’s commercial real estate investor is a unique, once-in-a-lifetime opportunity. There is a glut of vacant commercial space that has pushed prices down. Many businesses downsized their office spaces during the past two years as they shifted to WFH. They did not need the space or construction management to keep building.
WFH has been successful in some cases and will likely stay around in one form or another. However, many companies are seeing the need to get their staff back in the office. Elon Musk just recently demanded that Tesla white-collar workers return to the office full time. Many other companies are also following suit. The fact is that teams cannot successfully collaborate virtually as well as they can in person.
While we may be heading for a recession and a pullback in the residential market, the commercial market will fare much better. Historically, we know that the commercial market is much less volatile than the residential market. With many companies returning to the office after ending WFH policies, it may be an especially good time to invest in commercial office space.
Are you looking to renovate a new or existing office?
What About Interest Rates?
As an investor, you may be concerned about how rising interest rates affect your investment return. In comparison, rates have indeed gone up. The Federal Reserve Bank has indicated that rates will continue to rise throughout the year as they attempt to slow down an overheated economy.
Again we can look back in history and see how the commercial market and property management fared during similar periods. It is important to note that while rates have increased, they are not high by historical standards. Rates are going from extremely low back up to their historical average. In the early 1980s, some residential and commercial real estate loan rates were in the teens and sometimes approached 20%.
There is no reason to think commercial office space will approach anything near those levels. They are simply on the way back up to around seven or eight percent, which is right around the average rate we have seen throughout history.
The Present Opportunity
These next few years could be a perfect time to invest in commercial real estate. Currently, prices for commercial real estate are quite reasonable. They stand to increase as property brokers rush to fill the space with new tenants.
Both existing buildings and new construction management will be solid investments. The excess of vacancies in the marketplace is driving an artificial boom. Incidentally, many property management firms take on new clients at discounted rates.
This unique mix of market factors makes 2022 and 2023 banner years to invest in full-service real estate.
Key Takeaways
- Commercial office space investments have fared better than residential real estate in recessions.
- There is a glut of high-quality, inexpensive full-service real estate nationwide. This phenomenon is due to many companies downsizing their offices and construction management during the pandemic.
- Many companies realize Work From Home is not sustainable for their businesses’ long-term growth. As a result, they require employees to head back to the office.
- Interest rates will likely remain at reasonable levels for the foreseeable future.
Contact us today for a free commercial real estate consultation!
About NAI Glickman Kovago & Jacobs
As the leading commercial realtors in Worcester, MA, NAI Glickman Kovago & Jacobs focuses on commercial property listings. We have an award-winning restaurant, retail, office, industrial, multifamily, and medical real estate management record.
We can also assist with land acquisition and development as a commercial brokerage. Our deep local knowledge comes from decades of business partnerships with construction management and key community vendors. Whether buying, selling, or leasing, we can find the right property brokers to fit your needs.
Contact us today if you need help finding commercial property for sale, brokerage, commercial construction, or property management services in Worcester, MA. You can also follow us on Facebook, Instagram, and LinkedIn for more updates about our full-service real estate in Worcester, MA.
