CREW LV: 2023 The State of Commercial Real Estate

by Adrienne Kwiatek-Holub

On Wednesday, February 2023, a panel of CREW LV experts shared their thoughts on the state of the Lehigh Valley Commercial Real Estate market. Areas of focus included multi-family, office, retail, property management, and banking. The panelists were: Tara Anthony (City Center Allentown), Lauren Borrell (NAI Summit), Jody King (CBRE, Inc.), and Adrienne Kwiatek-Holub (Fulton Bank). 

COVID disrupted the office market due to the widespread adoption of hybrid work. A push-pull now exists between companies that view office attendance as critical to success and the workforce that wants autonomy to decide where and when to work. Office utilization rates are unlikely to meet expectations in 2023. Many companies have put up the excess space for sublease, while others are waiting with the expectation of future growth or the goal of increasing office attendance. Some estimates suggest the optimal balance will be 15% less office space per employee than pre-pandemic.

There is a deep divide between prime and secondary office buildings that will continue to widen in 2023. Demand will be strong for the best buildings in attractive locations, with amenities that enhance employee well-being and engagement. Sustainable buildings that align with a company’s environmental and social targets will have an advantage. Drive times for the workforce will also be a decision point. Older, outdated buildings will struggle to attract tenants, leading to a glut of obsolete vacant space. Historically, the supply of less desirable office space supported a structural vacancy rate in the range of 12%. That rate will increase unless conversion or demolition removes these properties from the inventory.

The move to remote work during COVID changed multi-family residential spaces. People prefer to have co-working spaces and interesting common areas where they can work on their laptops but still be around others. Tenants look for attractive features like game rooms and rooftop lounges. They are drawn to the overall experience of living in a location, including the benefit of nearby amenities. The shift from big cities continues, which has fueled growth in the Lehigh Valley downtowns. People across multiple generations prefer to live in walkable, urban communities – but not as dense as the big-name cities. 

M-commerce (retail sales transacted through mobile devices) is expected to account for 47% of all e-commerce sales in 2023 and grow to 58% by 2027. Consumers will also rely on technology to research products online but buy or pick them up in stores. These “digitally influenced” sales will represent 62% of total retail sales in 2023 ($120 billion), growing to 70% by 2027. 

In the current climate, the expertise of property managers provides crucial assistance to real estate investors, particularly smaller investors who rely on the contacts, vendor pool, and accumulated knowledge of the Firm. Smaller investors may invest in real estate as an additional income stream but not as their main business. As such, their property manager serves as “boots on the ground” to understand and react to situations at their properties. Supply chain issues continue to be a concern, and lead times for materials remain historically long.   PMs frequently have more avenues to find available products due to a larger vendor pool. With aging buildings, PMs can make cost-effective suggestions, create capital plans, and advise on the most attractive modifications to keep real estate competitive in the current market. Property managers will suggest preventative maintenance and act in a risk management capacity to avoid exposure to lawsuits. 

Interest rates rose dramatically in 2022, as evidenced by the 5- and 10-year Treasury Rates. In January 2022, the 5-year rate started at 1.358% and reached a high of 4.446% in October. At comparable points in time, the 10-year rate was 1.649% in January, rising to 4.22% in October. Throughout much of 2022, an inverted yield curve occurred, in which longer-term 10-year rates were more attractive than the shorter 5-year rates. The higher rate environment did impact real estate investors looking to purchase new properties as the strong market pushed prices up, but the rising rates drove up bank debt service requirements.   Investors would have to either inject more cash into the deal or walk away from the purchase. Cash buyers were not impacted by this. Borrowers who fixed rates 5 years ago in 2018 in a dramatically different environment are now looking at significantly higher fixed rates for balloon loans or rate resets. If the loans were structured well at origination, there would be less concern given the expected amortization of principal and the increase in rental rates in the Lehigh Valley.

Related Articles