The COVID-19 pandemic changed a lot about the world, and now we are just beginning to see many of the more lasting effects.
One such effect is how more and more people working from home are changing commercial real estate markets. With fewer people needing office space, landlords are struggling to rent out office-oriented spaces and thus see their income rates diminishing.
More commercial office spaces are also coming onto the market, and while many are still in use, many are sitting empty or are being converted or repurposed.
The result of the diminishing rate of returns for commercial office space landlords is that commercial office space property values are also decreasing. As a result, commercial property assessments are falling, and so are their corresponding property taxes.
This new reality has a serious impact on American cities that rely on property taxes to fulfill essential services. The major cities in the US rely on commercial real estate for an average of 37% of their revenues, with a low of 26% in Los Angeles and a high of 56% in Atlanta.
The Issue of Increased Rates of Working From Home
One estimate says that up to 80% of jobs can be done from the comfort of home. Even with folks returning to work and the severity of the pandemic abating, 78% say they would like to continue working from home.
For businesses, rental space accounts for a huge portion of the budget. While it can improve company culture or at least change the perception of the company to have a brick-and-mortar office space, the savings on real estate rentals are undeniable.
This is why some are predicting that if a strong preference for working from home continues to persist, commercial real estate prices could fall by 12% to 25% in metro areas. These price declines will also lead to drops in property appraisals and assessments.
While the city governments will suffer from the drop in tax revenues, commercial property owners might start to see this as an opportunity.
This could be a great time to refinance at a low rate and take on a new challenge. This might involve renovating existing commercial real estate to host remote working spaces or other industries.
Or, commercial real estate owners might consider following the market to the suburbs and small towns to permanent remote workers are now flocking to.
The New Office Model
Despite any perceived negative consequences, the changing commercial real estate market may be a great thing, plus it will only require a few shifts and alterations before markets resettle.
The top commercial real estate cities of America like Atlanta, Austin, Charlotte, Chicago, LA, Miami, New York City, and San Francisco are seeing dropping populations because many are moving out of urban centers into suburbs and small towns, chasing after more affordable residential real estate.
To keep up, many employers were moving to a “hub and spoke” model of working, with a central office in an urban core with smaller satellite offices in the suburbs. Some are also renting out blocks of coworking spaces, forgoing the need to have their dedicated placard with just a few employees.
Both of these trends point to some shifting values in the world of commercial real estate appraisals. While appraisals in the major metropolitan areas may be decreasing, suburban office real estate prices can be expected to take an upward trajectory.
Between 2020 and 2021, office spaces accounted for 41% of conversions into new residential rental real estate. So while office space may be declining, there is also a potential new market for landlords to tap into with residential real estate. While offices and people may be moving to the suburbs, consistent demand remains for residential properties in big cities.
How to Get a Better Commercial Real Estate Appraisal & What to Look For
Appraisers will be bearing all of this information in mind as they consider new assessments for commercial real estate. While markets are in flux, it becomes more important than ever to stay on top of new and evolving information.
Moreover, appraisers may be finding themselves more in demand as commercial property owners seek to refinance as they change with the times.
One of the best ways that appraisers can stay in touch with clients and keep on top of appraisals is with an end-to-end appraisal software solution like Valcre. Whether appraisers are making their assessments in town or out in the suburbs, they can have immediate access to the data hosted in the cloud with Valcre, and what’s more, clients will also love the easy access and state-of-the-art reports.