Commercial real estate as a whole is facing a bumpy ride. The Green Street Commercial Property Price Index dropped by 0.6% in January month-over-month. This index decreased 14% from its March 2022 peak.

Source: Green Street (February 2022)

Peter Rothemund, Co-Head of Strategic Research at Green Street, notes:

“Commercial property prices are down about 15% from their peak…Most investors would probably agree with that, even if the yearly appraisal of their properties might suggest otherwise. So, while appraisals are likely headed lower, the real-time picture of property pricing shows a market where we’ve either reached bottom or are very close to it.”

According to the Green Street data, all commercial property sectors are down from their peaks.

Source: Green Street (February 2022)

Despite being bullish on rents and occupancy in the commercial sectors, the office space will continue to face headwinds this year. Andrew McCulloch, Green Street’s global head of data and analytics comments: “Despite an expected slowdown in the U.S. economy this year, rent and occupancy growth should remain solid across most sectors…Office rents and occupancy fell further in 2022, and the sector’s bottom is yet to be found. Green Street still expects work from home to reduce office demand by about 15% over time.”

Buyers increasing

Given the recent dip in mortgage rates, buyers are returning to the market according to Redfin. “Pending home sales posted their smallest decline since September during the four weeks ending February 5, falling 20% from a year earlier, and mortgage-purchase applications rose 3% from a week earlier.”

Source: Redfin (February 2023)

But we are still facing some uncertainty related to interest rates, according to Redfin Economics Research Lead Chen Zhao. 

“This year is more uncertain than most because the effects of last year’s rapid rate hikes are still flowing through the economy, and we’re not sure how much more the Fed will raise rates this year. So even after the Super Bowl comes and goes, we’ll be closely monitoring the Fed’s words and actions, along with inflation rates and indicators about the health of the labor market for signals that could affect homebuyer demand.”

That said, refinance applications are up according to Diana Olick of CNBC. Demand jumped 18% for refinances last week, even though they are still 75% lower than the same week one year ago. Similarly, new mortgage applications to purchase were up 3% last week.

Sabrina Speianu and Danielle Hale of Realtor.com report on home purchase sentiment, which improved slightly in January. The Fannie Mae Home Purchase Sentiment Index (HPSI) increased by 0.6 points last month, its third straight month of growth following eight months of decline. Seller sentiment is high, with most respondents believing that home prices will actually increase in the next 12 months.

Source: Fannie Mae (February 2023)

Aging homes

According to Na Zhao, principal economist at the National Association of Home Builders (NAHB), the median age of owner-occupied homes is currently 40 years. This number was 33 years in 2010, with NAHB suggesting we may be in for a great remodeling boom in the coming years. Further, new construction only added 8.3 million units from 2010 to 2021, accounting for 10% of the housing stock. This is down from 17% in 2011. 

Source: NAHB (Febraury 2023)

According to NAHB, the age distribution varies greatly between states, with New York having the oldest owner-occupied homes (62 years), followed by Rhode Island (58), and Massachusetts (57). Newer housing stock is primarily concentrated in the Sun Belt states, with Nevada homes being only 23 years old, followed by South Carolina, Georgia, and Arizona, where half of all owner-occupied homes were built in the last 28 years ago

Zhao comments on this state-by-state data:

“The geographic distribution of the age of the owner-occupied housing stock reflects population changes. Population changes, including both natural growth and net migration, signal a rising demand for housing. The rapid population growth states of Utah and Idaho, which grew at annualized rates of 1.7% and 1.8% from 2011 to 2021, respectively, have newer owner-occupied housing stocks with the corresponding median ages of 29.  However, states with negative annualized population growth, Illinois and West Virginia, have their owner-occupied housing stock older than the national median.”