“Corporate demand for office space is still low due to work-from-home policies,” notes Andrew Lucca, executive vice president at KeyBank Real Estate Capital. “Office vacancies increased during the pandemic, as many companies chose permanent remote work. Now, the question is: Do companies still need all that space? Many businesses have cut costs in corporate real estate because they can efficiently run their business remotely. It will be interesting to see how it all unfolds.”

Worth, for one, is optimistic.

“What is off the table are the doomsday predictions from back in mid-2020,” he says. At that point, some people believed companies were going to abandon offices altogether. “We may see some of that, but it’s going to be few and far between. I think employers and employees are going to find they really need to spend some meaningful amount of time together. Does that imply less need for office space? The question then becomes, how much less demand? There may be some reduction in the need for office space, but I think that has been wildly overestimated.”

Worth also notes that both the office and retail markets are being bolstered by a lack of new supply, which supports rents on existing properties. “The level of new construction in office and retail as a percentage of the existing stock has been running below 1% annually since 2011,” he says. “That muted supply has supported both of those markets.”

Repurposing Office Space
“One of the things we’re likely to see is some creative repurposing of office space,” says Rick Sharga, executive vice president of marketing at RealtyTrac, a leading provider of foreclosure information for investors, consumers and real estate professionals. He notes that one of the mayoral candidates in Los Angeles is talking about converting unused office space there into affordable housing.

“I wouldn’t be surprised to see some buildings that used to be exclusively office evolve into some sort of hybrid of office, retail and even residential units,” he says.

Sharga says there is a “Tale of Two Cities” story going on in the office market. The central business districts in the traditional hot metro areas like New York and San Francisco have not fared as well as suburban and secondary markets in either sales volume or price increases. So they may offer relative bargains going forward, he says.

For investors with a longer-term outlook, Sharga says there are some sectors of the commercial sector that represent a little more risk but potentially more reward than other commercial properties. That includes hotels, particularly limited-service hotels such as Marriott’s Fairfield Inns and Hilton Garden Inns. Some of those properties, he says, are available for less than a premium price right now because they are owned by small investors looking to exit.

Residential Real Estate
If any real estate sector faces potential headwinds it’s the residential market, which is coming off a 19% year-on-year increase in prices of existing homes, according to the widely followed S&P CoreLogic Case-Shiller U.S. National Home Price Index. At the same time, the average rate on a 30-year fixed rate mortgage as of May 5 had jumped to 5.27%, up from 3.22% in January, according to Freddie Mac.

Nevertheless, “the overall health of the residential market is very strong, and we definitely continue to be in a boom,” says Barry Habib, founder and CEO of MBS Highway, a Holmdel, N.J.-based provider of real estate data and marketing tools for mortgage loan officers. “We do not see a downturn with prices declining. Maybe the rate of increase will abate, which is a good thing, but we don’t see it headed the other way. Will I make money on my investment? Yes.”

Habib’s firm is forecasting high-single-digit appreciation over the next year, mainly due to rising demand not made up for by supply. “If you look at demographics, the crop of first-time home buyers over the next 12 months will be greater than last year’s but not as high as it’s going to be over the next couple of years,” he says. On the supply side, however, “we have significantly underbuilt by as many as four million homes—and we’ve never built more than two million homes in a year. It’s going to take a long time for that imbalance to work its way out.”

Habib acknowledges that buying a home in today’s market, what with skyrocketing home prices and mortgage rates amid limited inventory, is a lot more challenging than it was a few years ago. But if you’re lucky enough to buy a home, “the future is very bright for your investment to be protected and able to grow at a pretty reasonable rate of return,” Habib says. “Even if prices appreciate by only low single digits, with 10% down, that’s equivalent to a 40% or 50% return on your investment.”