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1 1 (December 6, 2023)

handle is hein.crs/govenpz0001 and id is 1 raw text is: Congressional ____ S.Research Service Commercial Real Estate Markets and Potential Macroeconomic Stress December 6, 2023 The commercial real estate (CRE) industry comprises different real estate sectors, including office, industrial, and retail space, as well as multifamily housing (e.g., apartments). Recent economic trends have some economists concerned about conditions in CRE markets, although economic conditions affect each of these segments differently. This Insight discusses the impact of changes in inflation and interest rates as well as post-pandemic work patterns on CRE. CRE and the Economy The CRE industry relies heavily upon borrowing, so tightening credit conditions or the devaluing of commercial property used as collateral can affect the ability of builders to obtain financing for new construction. Higher borrowing costs can reduce CRE growth or increase rents for CRE occupants. In turn, losses in CRE can affect those individuals and institutions that finance CRE, potentially causing further ripple effects on the economy. Conditions in certain CRE markets have some concerned about this sector. In the lead-up to and during the COVID-19 pandemic, interest rates throughout the economy were low, allowing for relatively inexpensive borrowing. As the pandemic and recovery progressed, supply chain constraints and other complications led to rapid inflation, ultimately leading the Federal Reserve to raise interest rates, thereby raising borrowing costs and tightening credit conditions. The office sector in particular is now showing signs of stress. The pandemic resulted in a structural shift away from in-office work, resulting in high vacancy rates for this segment of CRE that persist today. Due to the convergence of work-from-home policies and other economic pressures, many companies that would typically rent space from the office subsector of CRE owners are not renewing their leases. This is evidenced by higher office vacancy rates, which hit all-time highs earlier this year. Consequently, office property leases have fallen, generating lower revenues from rent, potentially imperiling the ability of the property owners to pay back financing costs. To minimize losses, some CRE owners have been willing to break leases and renegotiate terms with tenants. However, not all CRE segments are performing similarly. According to a recent October 2023 analysis from the National Association of Realtors, multifamily and retail properties are performing better than Congressional Research Service https://crsreports.congress.gov IN12283 CRS INSIGHT Prepared for Members and Committees of Congress

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