After a tumultuous two years, commercial real estate market conditions still haven’t stabilized. The COVID-19 pandemic has entered a less urgent phase, but now the public and private sectors are contending with its repercussions, including the end of stimulus programs.

During its quarterly survey of brokers from its independently owned member firms, CORFAC found that overall business sentiment in member markets remains encouraging, even as concerns emerge about the effects of inflation and rising interest rates on potential deals.

“CORFAC members are seeing strong deal activity even as we continue to contend with political and economic unknowns,” said 2022 CORFAC president Mason L. Capitani, SIOR, principal of L. Mason Capitani/CORFAC International in Detroit, Michigan. “Our quarterly survey shows that our brokers have a unique perspective on how macro trends affect their markets and can use that to help their clients make better future-looking decisions.”

Where deal activity is coming from

Looking at where CORFAC business is growing, the largest source of new business this year is existing clients who are expanding, according to 70% of members surveyed – an increase from 63% the previous year. Clients relocating to the market was the next highest source of new business at nearly 50%. Investor interest in secondary markets where price pressure isn’t as great, including those across the Midwest, is creating opportunity for CRE brokers.

Industrial continues to be the strongest CRE subsector for CORFAC members with 65% of respondents saying it drove business activity. CORFAC brokers are also seeing new activity from specialized niches of retail and office, such as medical offices and quick-serve restaurants in retail, while big-box retail and large office buildings are being readapted as logistics spaces.

“While residential migration to outer markets has slowed, industrial interest in secondary markets is very strong,” said Hayim Mizrachi, CCIM, president of MDL Group/CORFAC International in Las Vegas, Nevada. “There is pent-up demand for this product.”

The impact of work and commerce changes

Shifting consumer behaviors in the 2020s ­– particularly the growth of work from home and digital commerce, as well as the great job migration – will shape CRE trends for the near future. Specifically, 62% of members believe office will be the CRE sector that changes the most in 2022, as companies are still adjusting to the growth of remote and hybrid workforces. However, some members point to huge multinational corporations such as Google bringing back employees to the office as a reason for optimism.

CORFAC brokers were asked what their greatest concerns are looking at current events and macroeconomic trends. More than 55% of members identified inflation and rising interest rates as the factor that will have the most negative effect on CRE transaction activity. Continued supply chain challenges and the constrained labor market are compounding those rising costs to cause uncertainty in the CRE marketplace.

As one member summed it up, “Consumer spending has been strong through the last 12 months as we thought we were rebounding from the global pandemic and all the related implications, but now with inflation rising and consumer spending reduced, the economy will slow and have rippling effects on all sectors.”

Strong sentiment in the face of concerns

Despite these worries, half of CORFAC members describe overall business sentiment in their market as “somewhat positive” and another third say it’s “very positive.” The strength of the industrial subsector and readily available capital are common reasons for this positivity. Yet, other members are hoping for some changes in government leadership, tax policy or both to help buoy businesses and CRE activity.

As business owners try to understand how economic policies will impact their real estate plans, CORFAC brokers will draw from local experience and global network insights to help them make confident decisions.

CORFAC International is a network of independently owned commercial real estate firms. CORFAC has 70 offices across the globe.

First there was COVID. Then came the uncertainty of when, or if, employees would return to the office. Now comes inflation and rising interest rates. No wonder the office market remains in limbo across the United States.

JLL recently released its second quarter office outlook and, in little surprise, it shows an office market that is still struggling to regain its momentum following the pandemic while facing an uncertain economy.

According to the report, office transactions remained largely flat in the second quarter. JLL reported that gross leasing activity totaled 47.2 million square feet in the quarter, an increase of just 0.1% from the first quarter of the year. The reason for the sluggish activity level? Tenants, both large and small, have put their expansion plans on hold as they wait to see the impact of inflation and rising interest rates.

The U.S. office sector is still lagging when compared to the months before the pandemic. JLL says that second quarter leasing activity in the U.S. office market is now at 75.5% of its pre-pandemic norms.

Despite economic uncertainty, nearly half of all completed office leases in the second quarter came in at 10 years or longer, keeping the average lease term at eight years. Short-term expansions remained below 20% of all office lease activity, JLL reported.

Net absorption remained negative in the U.S. office market in the second quarter, with 7.8 million square feet of net occupancy loss during the most recent three months. A majority of the quarter’s negative net absorption — 69.4% — came in the Class-B and Class-C sectors.

Combined with 11.8 million square feet of new office deliveries in the quarter, this negative net absorption led to a 30-basis point rise in vacancy to a new high of 18.9% across the United States. The office vacancy rate stood at 16.5% for buildings delivered since 2015 and 19% for older properties.

Even in the down market, developers are bringing new office space to the U.S. market. According to JLL, that 11.8 million square feet of new office space delivered between April and June brought year-to-date completions to 26.5 million square feet. That puts the U.S. office market on track to repeat 2021’s more than 50 million square feet of new office space.