US Commercial Real Estate Outlook: Seeking Calmer Waters in Quality

The COVID-19 pandemic upended the way we live and work by creating secular changes and accelerating trends that were already afoot. For investors in commercial real estate, the results have been mixed.

The pandemic hurt small retailers by hastening the transition to digital commerce and emptied office buildings by turning living rooms into workspace. But it also fueled a warehouse building boom and unleashed a torrent of pent-up travel-and-leisure spending when economies reopened, underscoring the diversity of commercial real estate.

Recent turmoil in the banking industry has renewed concerns that the crosswinds buffeting commercial real estate could turn into headwinds. Of particular concern are midsized and regional banks, which purchase commercial mortgage-backed securities (CMBS) and are active commercial real estate lenders. A pullback in lending by regional banks could create a credit crunch that would have a negative impact on real estate valuations.

There’s no doubting the many challenges facing commercial real estate, but we believe the issues afflicting banks are largely idiosyncratic, rather than systemic. Moreover, the commercial mortgage market is too diverse to be painted with the same brush—fundamentals vary widely by property type, location and quality. For investors, conducting thoughtful due diligence and picking the right spots has never been more important.