Rigorous risk management needs to be the watchword for lenders in the world of commercial real estate amid the uncertainties afflicting most segments of the market, according to CoStar. "The rapidly changing market conditions underscore the importance of monitoring market trends and LTV [loan to value] with live data as an essential factor in managing credit risk effectively," advised CoStar's November 2023 update.
In the retail sector, smaller seems to be better. The average size of a new retail lease in the first 10 months of 2023 was 3,265 SF – the lowest level since 2007, and below the 10-year average of 3,500 SF. Yet even though leases for spaces of less than 2,000 SF held relatively stable compared to 2022 with more spaces available, that is not expected to continue.
CoStar predicts demand for such spaces will fall 2% year over year with an even larger drop of 7% for spaces over 2,000 SF in the same period. Meanwhile, a lack of available supply has hurt leasing of large and mid-sized spaces over 10,000 SF along with a drop-off in new construction starts.
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The hospitality sector has 146,000 rooms under construction and a further 40% planned. This would bring the total to 242,000. About one-third of all rooms under construction are in the top 25 largest markets "with possible supply pressures mounting in New York, Phoenix, Tampa, and more," CoStar commented. Investors are looking into attractive markets like Atlanta, Houston and Dallas as demand recovers.
However, while room demand is rising again in most hotel segments, economy hotels are seeing a continuation of the decline that began in April 2022 as inflation hits. Rooms sold in the economy segment have slumped from 285 million in 2020 to 265 million this summer.
Nationally, new apartment supply caused a 0.4% decline in October 2023 rents compared to September, when they fell 0.5%. However, on a year-over-year basis, rents rose 0.7% in October "illustrating the continued slowing trend seen over the past year," CoStar reported. The worst hit markets were in the West and South, where rents fell 0.6% and 0.5% respectively. Indeed, rents fell in all but six of the top 50 markets in October.
As for offices, "five years into the current downturn, 84% of markets will still be at least 10% down from their recent peak, making loan workouts challenging," CoStar projected. The outlook for industrial properties is brighter. CoStar expects them to remain near peak values and recover at a much faster pace than during the Global Financial Crisis of 2008.
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