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Where is Commercial Real Estate Headed?

by Neil A. Dolgin

Welcome to 2023 and the questions that are on everyone’s mind:  Will we have recession? Will it hit hard? Will there be a soft landing? Economists expect economic growth to slow this year, and we will narrowly avoid a recession. Wherever I turn, however, everyone has their own point of view. 

Economic uncertainty

I think we can all agree that these are uncertain times. Last year’s dramatic rise in interest rates impacted the entire real estate industry. While rates eased slightly toward the end of 2022, the uncertain economy has made it difficult for investors to predict the future performance of commercial real estate assets. Under these conditions, most of the large investors (REITs or a Funds) are sitting on the sidelines and we’re seeing fewer commercial building sales.

Rentals are thriving

The rise of e-commerce and changing business needs are driving a shift in the types of commercial properties that are in demand locally. 

New e-commerce and delivery businesses are driving rentals of industrial properties that can be used for warehouse and distribution purposes – 2,500SF-3,500SF units – that are suited to small businesses looking to relocate in the outer boroughs. These are mom- and pop-type businesses – energy companies, builders, electricians, HVAC companies and small manufacturers – aiming to take advantage of the NYC marketplace.

Unsold industrial buildings are returning to the rental marketplace with smaller, rentable units, and that’s helping to meet this growing demand. If you’re an owner of a vacant industrial building and you don’t need to sell right now, it might be a good time to renovate your building and return it to the rental marketplace. Reach out and let’s explore the possibilities.

In this marketplace, owners can expect to see improved occupancy rates. Tenants will be able to benefit from a wider choice of rentals and the improved ability to negotiate beneficial terms. 

Interest rates

High interest rates have slowed the sale of commercial buildings. Can investors afford to take a loan at 6% to 17%? Are banks willing to offer a loan for a value percentage that makes it easier, not more difficult, to finance a purchase? I’ve recently had two deals that have come back to me because buyers were unable to secure the needed financing.  

Climate change impacts

Many landlords are investing in upgrades to their buildings to improve indoor air quality and make their buildings safer for tenants. Our team is also meeting to discuss how Local Law 97 will affect the buildings that we own as well as those that we manage for clients. 

New York City’s Local Law 97 aims at a dramatic reduction in carbon emissions produced by the city’s largest buildings of 40 percent by 2030 and 80 percent by 2050. It requires buildings to meet specific emissions standards starting in 2024.

Owners are still recovering economically from the pandemic and historic weather events of 2021 and 2022. Compliance with Local Law 97 will be very costly. Will owners be able to secure financing for the required renovations and will the City help? Will there be tax offsets? Our concern is always that higher costs incurred by building owners generally translate into higher rents. If rents continue to rise because owners are scrambling to cover these new costs, will we then see a migration of commercial tenants leaving the City for less expensive rentals that are available elsewhere?  

Local Law 97 is being challenged in the courts right now by a group of owners and residents who say that law violates building owners’ rights to Due Process, and levies an unauthorized tax on emissions. 

Remote work 

The idea of working at home took off during the COVID-19 pandemic; it has accelerated dramatically and this appears to be having a long-term impact on the demand for office space. In New York City the average office building occupancy rate is 60-75% compared with 90% at the end of 2019. If remote work is here to stay, the question becomes how quickly can some of those vacant office buildings be rezoned and converted into multi-use retail, housing and offices?

That’s my take on where commercial real estate is headed. How is 2023 going for you?  If you have a question on today’s commercial real estate marketplace, email me any time.

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Neil A. Dolgin is co-president of Kalmon Dolgin Affiliates. Founded in 1904, Kalmon Dolgin Affiliates (KDA) has grown into one of the New York metropolitan region’s leading commercial and industrial real estate firms. Kalmon Dolgin Affiliates specialize in all aspects of real estate services for developing, managing, selling, leasing and marketing commercial and industrial property. KDA’s highly-trained professional brokers offer clients a practical, street-wise approach to commercial and industrial real estate brokerage, leasing and sales, supported by the latest in real estate marketing, management and research technology.

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