Federal Reserve Chairwoman Janet Yellin recently referenced less-than-stellar payroll growth in May and a slower-than-expected pace of improvement in the labor market overall as well as “diminished” job gains as primary reasons for the Fed’s decision to again put off raising interest rates.
Despite muted levels of construction, continuing rent growth and vacancies in the U.S. commercial real estate market still drifting downward and a pick-up in overall economic activity, investor sentiment indicates a widening belief that the office market – including Philly office space and Philly retail space – may have reached its peak, or is expected to continue slow but steady improvement and not a spike in leasing activity as previously hoped.
For some risk-adverse property investors, this is the point where they begin assuming a defensive position to protect and preserve the value of their holdings the U.S. and Philadelphia commercial real estate market, rather than buying vacancy in hopes of rolling up to market rents.
This report on national and Philadelphia commercial properties was made through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.
More building owners are focusing on shoring up tenant lease renewals in high-construction markets where vacancies have plummeted and rents have substantially increased, such as U.S. and Philadelphia commercial real estate properties and those in San Francisco, New York City and Chicago, noted Paul Leonard, real estate economist with CoStar Portfolio Strategy. In some cases, owners are again throwing in free rent and other concessions.
“Landlords should consider locking in existing tenants at today’s relatively high rates,” Leonard said in a recent client note. “Attention should especially be given to assets in tech-heavy markets on the West Coast, where the gap between embedded rents and market rents is greatest and where lease terms are some of the shortest, and assets in large-tenant markets like New York and Washington, D.C., where the lease terms are longer than average, but the probability of renewal is poor.”
With vacancy and availability spreads in both national and Philadelphia commercial real estate listings widening and landlords starting to offer concessions, it would be prudent for landlords to underwrite softer rent growth and less aggressive renewal terms, despite historically low vacancies, said CoStar Portfolio Strategy economist Donald Hall.
“After all, local landlords know their slice of the market better than anyone, so it makes sense to heed their warnings,” he added.
One executive at a real estate investment firm that deploys capital for private families and foreign investors, predicts that pension funds will be the first to adopt a defensive position on acquisitions of higher-vacancy or value-added U.S. and Philadelphia commercial real estate listings, followed by insurance companies.
For investors still targeting value-add properties, CoStar’s “recession scenario” economic modeling found that pivoting to locations that show less downside risk in the event of a recession may help preserve value during a typical three- to five-year investment holding period.
Such segments of the U.S. commercial real estate market – including Philly office space and Philly retail space – include those that have seen limited new construction and stronger demographic growth. Those include several former housing bust markets in the South, according to Walter Page, director of research, office for CoStar.
For more information about Philly office space, Philly retail space or other Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) Leor Hemo (leor.hemo@wolfcre.com) or Lee Fein (lee.fein@wolfcre.com) at Wolf Commercial Real Estate, a leading Philadelphia commercial real estate broker that specializes in Philly office space and Philly retail space.
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