Commercial Real Estate: ‘Demand growth should help keep occupancy and rents growing’

Christian Oldenburg of Colliers offers insight on market.

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  • | 5:00 a.m. April 19, 2022
Christian Oldenburg
Christian Oldenburg
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By Christian Oldenburg | Executive Managing Director, Market Leader, Colliers North Florida

At its core, commercial real estate is about making money by leasing or selling property in a manner that maximizes operating cash flow and profit. 

Based on this standard of performance, 2021 was a great year for most commercial real estate investors. All product types saw increases in market rent, occupancy and interest from buyers. 

Even office – easily the most challenged asset class in the post-pandemic world – managed gains from the lows of 2020. 

Supply chain disruptions drove notable increases in construction costs and certain operating expenses, but those increases were more than offset by increases in revenue growth and valuation. 

The 2022 outlook is a bit different.

The economy has largely recovered and inflation is running hot, bringing talk of multiple interest rate hikes this year. This has driven the interest rate on the 10-year Treasury note – a key benchmark for lending – to increase fivefold since the summer of 2020. 

As a result, interest rates on commercial property loans have increased as well. 

With money becoming more expensive, property owners need to see continued strong growth in rental revenue. Without it, owners will be forced to spend more of their hard-earned cash flow on interest payments, thus reducing their returns.  

Should this unfold, many prospective investors would respond by bidding less aggressively on assets to preserve their returns. 

Also complicating matters are the confounding labor market and supply chain, which are driving shortages of goods and labor that continue to drive pricing higher across nearly all industries.

Impacts from these disruptions will be felt across commercial real estate this year but will be particularly pronounced in construction, including everything from outfitting new spaces for tenants to large-scale ground-up construction. 

The only way for developers and property owners to sustain these increases is to charge higher rents. This is bad news for people who lease space, and it is sustainable only so long as cash flow growth continues for lessees of commercial space. 

Without that cash flow growth, either lessees will be squeezed, or landlords will suffer as lessees balk at higher rental rates. 

Fortunately for us Floridians, we have one major macro trend on our side that will help us continue to drive revenue growth and overcome some of the aforementioned hurdles: our status as a high-growth region. 

Among the top 50 metropolitan areas in the country, Jacksonville ranks ninth for growth, both since 2010 and in projections of what will happen by 2026. 

In fact, our area is expected to add more than 138,000 new residents by then. That represents a compound annual growth rate of almost 1.7%, which is nearly double the growth rate of the median market. 

This will be an incredibly powerful driver of health in the 2022 commercial real estate market.

New residents need apartments, houses, office space, retail space and industrial space to support the associated supply chain. 

This demand growth should help keep occupancy and rents growing as long as the pipeline of new development remains measured. 

The commercial real estate industry is influenced by several contributing and competing factors. 

How 2022 stacks up against 2021 will depend on whether demand for space, driven by migration trends and general economic strength, can overpower higher interest rates and expense inflation. 

It is sometimes said that bull markets climb a wall of worry and that was certainly true of the 2021 commercial real estate market. 

We see 2022 being similar for Jacksonville and broader Florida.

Christian Oldenburg is a director-at-large of the NAIOP Commercial Real Estate Development association Northeast Florida Chapter.