A bright outlook is emerging for certain sectors – but storm clouds are still present elsewhere
The volatility and unpredictability that have gripped the US commercial mortgage space in recent years are continuing to linger – but prospects for specific asset classes are still rosier than others.
While optimism is building around sectors including the multifamily space, others still face a stormy outlook. Among those, unsurprisingly, is an office market that’s been pummeled by shifting workplace norms and an explosion in work-from-home arrangements since the arrival of the COVID-19 pandemic in the US in 2020.
For Alex Horn (pictured top), managing partner and founder at commercial lender BridgeInvest, the multifamily market has room for growth in the coming years, even if it currently faces many of the same headwinds as the wider commercial market. “On multifamily, we still tend to be pretty bullish,” he said. “There’s a lack of inventory of about four million homes in this country that need to be built by 2035, so I think there’s a big need there for more housing and right now, the cost replace is going up – in turn, pushing values up.
“So in the short term, we see a little bit of softness in the market, but in the medium to long term, we see a very big need for more houses in this country and, as such, values are going to continue to increase.”
What new trends are at play in the commercial mortgage market?
A pronounced change in consumer habits in recent years has seen the US grow as an ecommerce economy, with geopolitical tensions helping spur a trend toward nearshoring and onshoring by major companies and distributors.
Those trends saw the industrial market gather significant pace in recent years – and for Horn, the strength of that asset class is set to continue looking ahead, with retail also witnessing a noteworthy rebound. “This likely is a lot to do [with] the purge of the last decade,” he said, “of getting rid of that retail so that we’ve shrunk [its] footprint in general, and now we’re seeing really good opportunities in that space and very strong retail properties.”
Senior loan officer Kristin O’Neil of Open Door Lending noted that while there has been a midsummer slowdown, the market remains robust.
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Hospitality was a sector that suffered heavily during the pandemic as travel ground to a halt and businesses shut their doors. The subsequent return to normality has seen that asset class rebound, although the uncertain outlook for the national economy could dent that recovery somewhat in 2025.
A recent PwC report signaled that the possible bumpiness ahead for the US economy, as well as geopolitical unrest and the looming presidential election, could weigh down on hospitality prospects, even though annual occupancy is still expected to tick upwards slightly by the end of 2024.
Is there any respite in store for the office market?
A sluggish pace of return-to-office efforts in the US compared to elsewhere, meanwhile, is one of the factors making the office sector a difficult one to underwrite, according to Horn. “The US is still lagging Asia and Europe in office,” he said. “The last we saw, it was only about 50% back into the office [in the US], which is a staggering number when you consider how slow that is.
“And frankly, on office, we need supply destruction. So there will be winners, but there will also be a lot of losers. And right now, we’re just kind of waiting through what that looks like once we get through the supply destruction of office.”
Among the only office transaction types that are currently popular, he added, are those where the seller is willing to offer some sort of financing on the deal – and for those who play their cards right in navigating the market, there are certainly opportunities at present. “I think people will buy office correctly and you have a huge upside potential,” he said.
“But it’s still very hard to predict because there is going to be a need for office – just, I think the inferior product needs to be destroyed.”
Some good news for the beleaguered office market arrived through a report by Avison Young showing the overall availability rate for office space in the US is beginning to stabilize.
The real estate firm said that rate (23.7%) was nearly unchanged between Q1 and Q2 of this year, even though it sits a sizable 40 basis points above the same point in 2023. “While the availability rate remains historically high,” the report said, “the slowdown in supply growth is a welcome sign for the future of the US office market.”
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