ext year is going to be tough in capital markets.”
With those words, Spencer Levy of CBRE captured the attention of everyone at the Fall 2023 Professional Forum of the Industrial Asset Management Council in Boise, Idaho, on September 11. But he also did something else: He reassured all 400-plus attendees that plenty of opportunities remain for savvy investors as long as they know where to look for real estate and talent.
In his “Commercial Real Estate State of the Market” keynote address, the global client strategist and senior economic advisor for CBRE began with the good news: “Rates will start falling by the first quarter of 2024, and rates will come down faster than you think,” he said. “Remember the first rule: Wall Street is always wrong. The Federal Funds Rate will start falling in the first quarter of next year and will drop to 3.5% by the end of 2024.”
With that drop comes opportunity, says Levy. “Commercial real estate deal volume is really bad right now, and investment volume is expected to decline,” he noted. “Values have dropped in all property sectors. Most experts believe that cap rates are peaking.”
Among the most challenged real estate markets right now, he says, is Class B office space. “It is in a similar condition to retail — overbuilt and under-demolished,” said Levy. “We are de-globalizing. Resilience matters, and it’s done better when it’s closer to home.”
The key is to make sure that you are investing in locations that have talent, he advised. “Canada is eating our lunch at getting more skilled labor through immigration, and labor is everything,” he said.
Dr. Wayne Gearey, chief labor economist for Savills in Dallas, confirmed that assessment when he also noted at IAMC that Calgary is the No. 1 market in North America for engineering talent and No. 3 for technology workers among all tier two markets on the continent. “We are seeing demand for machine learning skills up 315% and a 275% increase in reshoring since 2021,” said Gearey, who regularly advises corporate clients on where to access technical talent.
In other encouraging news, Levy noted that industrial rent growth is now slowing for clients, and there is new interest from investors in building more affordable housing for workers. “Large manufacturing companies are asking me, ‘Can I build affordable housing for my workers?’ The answer is yes. You could add 5 million new multifamily housing units today and the U.S. would still have a housing shortage.”
“Rates will start falling by the first quarter of 2024, and rates will come down faster than you think.”
– Spencer Levy, Global Client Strategist & Senior Economic Advisor, CBRE
He added that “multifamily absorption is making a big rebound, and the multifamily vacancy rate has inched up to 5%.”
On the hot topic of remote work vs. return-to-office policies, Levy said that “the return-to-office dilemma is Labor vs. Management 101. Senior executives are getting their private offices back, but the average weekly office utilization rate in the U.S. right now is still less than 50%.”
Sources: CBRE Research, CBRE Econometric Advisors, U.S. Bureau of Labor Statistics, Statistics Canada, Oxford Economics, The National Center of Education Statistics, National Science Foundation, Axiometrics, 2023.
For those advocating that downtown office buildings be converted to apartments or condos, Levy was less bullish. “Only 10% of all office buildings in America can be converted to multifamily housing,” he said. A better solution, he said, is to make office buildings more desirable places for the workers. Among the amenities that workers want most, he noted, are better public transportation access, better on-site parking, and on-site food and beverage service. They also want shorter commute times.
A CBRE report released yesterday says office conversions are “on pace to more than double their recent annual average this year,” with nearly 100 projects expected to be completed this year across 40 major U.S. markets — “a sharp increase from the annual average of 41 completed from 2016 to 2022.” Forty-eight percent of them are conversions to multifamily, but in keeping with Levy’s assertion that amenities rule, conversion to mixed-use is on the rise, CBRE stated.
On the subject of talent migration, Levy in his remarks in Boise said that employers and investors will want to follow the migration patterns of skilled labor, and right now that workforce is moving to places like Austin, Tampa, Nashville, Charlotte and Denver, and leaving locations like San Francisco, New York and Chicago.
Despite these patterns of movement, San Francisco, Seattle and New York still rank the highest on the latest CBRE Tech Talent Scorecard. Washington, D.C., and Toronto round out the top five.