The private commercial real estate market will bottom out this year and offer opportunities for those looking to get into the sector, according to a report by real estate investing firm Cohen & Steers.
The outlook is partly based on the performance of REITs, which can predict market movements by four or five quarters, according to James Corl, head of Private Real Estate at the New York-based firm and author of the report.
REITs peaked in late 2021 and later bottomed out under the weight of persistent Fed interest rate increases.
“REITs bottomed out as it became apparent the interest rate picture was not going to get any worse,” Corl said in an interview. “That tells us historically ... that private real estate will be bottoming over the next four or five quarters.”
REITs are down about 30% and the firm anticipates that privately traded commercial real estate prices will be down about 25% and are already about two-thirds of the way there, according to Corl.
“Not everything bottoms out at the same time and not everything is going to be down by the same amount,” he said. “We believe that certain property types are going to be hit worse.”
Topping that list is office space, which is undergoing a secular change as workers look to transition to move away from the more traditional office buildings, he said. The younger generations do not want to work in those buildings, which were built in the80s for the baby boomer generation, Corl explained.
But he said some segments of the office sector could present opportunities. Newer suburban offices, he said, are more attractive to younger workers because they are usually closer to affordable housing, contain more amenities and within easy access to restaurants and entertainment.
“There’s a very clear migration from older buildings to newer buildings, so whether or not you’re experiencing growth in demand or not as an office building really depends on how old an office you are,” he said. “If you’re new you’re doing fine. ... If you’re not new, you are really facing some serious headwinds depending on the level of obsolescence in your location.”
Another area of opportunity is in retail, specifically open-air shopping centers, Corl said. Their valuations have been beaten down and prices are attractive due to high yields.
These retail spaces are anchored by stores such as Target and Walmart and have become what Corl referred to as last-mile warehouses. Shoppers can shop at those stores either in person or online and pick the product up without having to travel far.
“These big strong anchor tenants ... are the folks who are not only surviving in the internet shopping era, but they’re flourishing in the face of competition from online because ... the best price is typically not at Amazon,” Corl said.