Atypical Market Downturn Heightens Recovery Challenges for CRE

Investors and economists say that the scale of the current commercial real estate market downturn is like a déjà vu of the 1970s “when a recession followed surging oil prices and a stock-market rout while new technologies enabled jobs to move out of major cities.”  Current commercial property upheaval accelerated by the pandemic has left landlords simultaneously contending with “a cyclical market downturn and with secular changes in the way people work, live and shop;” falling property values due to the sudden surge in interest rates; and a reduction in demand for office and retail space with the rise of remote work and e-commerce. While the full impact of these multiple converging forces has yet to be determined, some analysts say that the depth of the downturn may “well end up less severe than the previous two downturns,” “especially if the U.S. economy avoids a deep recession and interest rates start to come down quickly.” However, unlike previous rebounds, it is anticipated that building values are less likely to rebound to the new highs reached in past recovery periods in part due to fundamental trends not as favorable, suggesting that unlike previous rebounds, commercial real estate won’t contribute as much to the country’s economic growth.