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US commercial real estate recovery lags behind residential, say agents

At a commercial economic issues and trends forum National Association of Realtors chief economist Lawrence Yun led a panel discussion about the forces shaping commercial real estate markets.

The panellists agreed that the market has improved and expressed confidence that continued recovery in the economy will drive commercial real estate growth.

‘Commercial real estate usually recovers two years behind the economy. However, NAR members who practice commercial real estate are seeing a three to four year wait. It has been a long and slow recovery, but it is happening,’ said Yun.

The forum heard that there are still headwinds facing the commercial sector. Subpar Gross Domestic Product growth, stagnating wage growth and low employment rates are all affecting demand for commercial properties.

Yun explained that improving those underlying fundamentals is instrumental in maintaining a strong commercial market and another major hurdle facing the recovery is the lack of financing available for small investors.

While large companies can access financing from Wall Street or international buyers, most financing for smaller investors still comes from regional or local banks and credit unions. Many of those small banks are hesitant or reluctant to give out commercial loans.

‘New financial regulations for all banks, big and small, are resulting in smaller banks bearing proportionally higher compliance costs. The little guys are taking the brunt of this. Maybe there should be waivers for smaller banks so they can give out the loans businesses need and help with community development,’ Yun added.

According to Sam Chandan, founder and chief economist of Chandan Economics and associate faculty member at The Wharton School of the University of Pennsylvania, when it comes to multifamily homes Millennials love to rent.

They prefer the flexibility and proximity to amenities that comes with renting rather than owning. However, that fails to take into account that while Millennials will always be Millennials, Millennials will not always be in their twenties. You could ask a 22 year old at any point in history if they want to own a house in the suburbs, move away from urban centres, or own a minivan and they will say no. But that answer has changed in the past and it will change again, and the multifamily sector needs to develop a narrative that takes that into account,’ he explained.

The same problem is affecting other commercial markets, such as retail. Online commerce has changed the way commercial retail positions itself and attracts buyers.

‘While it’s true that you will never be able to get a haircut online, the same cannot be said for buying books or groceries. We cannot assume that because people always shopped at grocery stores that they will not learn and adopt another way,’ said Chandan.

‘The commercial market needs to develop a narrative that evaluates how flexible people are with their shopping habits,’ he added.