How High Interest Rates Affect CRE: What Corporate Tenants Should Know

Inflation is the highest it's been since the early 1980s. Driven by the goal to quell its further growth and pull out liquidity of the economy, interest rates have gone up. As a result, real estate investors are running scared.  

Some of the biggest players in commercial real estate are being hit hard. But, don’t worry- that doesn’t mean you can’t make the most of the market conditions. Learn how: 

• Record inflation is changing real estate  
• Blackstone is handling investor withdrawals  
• Layoffs will further complicate space utilization in offices  
• Corporate tenants can cut costs, even now 
  
  

How Skyrocketing Inflation is Affecting CRE 

Inflation is now at 7.1% The FED's decision on December 13th cooled down inflation from its high of 7.7% in October, but still let’s put that record number into perspective. According to U.S. Labor Department data, this has risen 8.2% The CPI last month was more than triple the FED’s targeted of 2%. This threat of teetering on the recession has caused the FED to lift interest rates. As a result, investors are no longer viewing real estate as the strong move it was.  

Not only this, but CRE is even more of an uncertain investment with the prevalence of the WFH movement. Currently, it is unclear where the future of commercial space lies. With so many large-scale organizations cutting down their spending by shedding underused space, the tide has turned to limited in-person offices that are closer to ideal space utilization. 

Companies are closing offices or subleasing extra space. As a result, record vacancy rates have CRE property owners in a chokehold. With so much cheap, empty space on the market, they have to significantly reduce their profit margin by getting more competitive to lure in long-term tenants. This means that even if they find that perfect, credit-worthy tenant, they should be prepared to shell out a hefty tenant improvement allowance and lure them in with a low base rent.  

This has led to a blow to the overall value of commercial real estate properties, that could very well intensify into 2023 and beyond. 

This also means that if you are looking for office space right now, this is your time! However, this is not the time to be using the landlord's broker. You don't want to get this opportunity wrong. Learn how to leverage your tenancy to get the best property, price, and terms in our free course.

Blackstone’s Real Estate Hit  

Weak demand and an overall cooling market has investors looking for an out- and no company is safe, no matter its breadth.  

Not even a behemoth in the real estate sector like Blackstone is immune. Their $69 billion unlisted real estate income trust (REIT) was bombarded by withdrawal requests which triggered pre-set limits on redemptions. According to Reuters, “it received redemption requests in November greater than 2% of its monthly net asset value and 5% of its quarterly net asset value.” 

As a result, Blackstone was forced to put a freeze on further withdrawals, only allowing less than half of the investors repurchase requests. Still the 43% of requests that went through were totaled to about $1.3 billion. 

Slowing interest in the REIT, which represents about 17% of Blackstone's earnings, signals trouble on the horizon. Not only does this threaten Blackstone’s status as a titan of CRE- but it points to a harbinger of darker things to come given the continued, elevated interest rates. This is especially true since Blackstone is one of the largest global owners of real estate. Therefore, their moves speak to greater forces at play. The world pays attention to their CRE decisions. And If investors are pulling out of forces like Blackstone, they see less long-term stability in real estate asset class overall.  

What Blackstone’s Moves Mean for the CRE Field  

The influential powerhouse has a habit of creating trends by their CRE moves. For example, they are credited as one of the first massive organizations to spearhead the corporate migration to Florida. After they signed a long-term lease in Miami, over 300 financial services followed suit. For more on that, check out this article: Why Miami is a CRE Hotspot.

But the point is that more companies will likely follow Blackstone’s lead. Unfortunately, in this case, the circumstances likely to take trend are quite negative. 

This comes as Wells Fargo, the multinational financial services firm, has announced it is cutting its numbers with extensive layoffs to contend with overall higher costs and low demand.  

How Layoffs Worsen the Drain of Underutilized Space  

Wells Fargo is only one of the many organizations to announce layoffs. This is only sure to get more common in the common months as 98% of CEOs prepare for a recession, according to CNBC.  

However, layoffs only further complicate the issue of misguided CRE spending. While personnel costs are typically a company’s most significant expense, real estate is usually the second. 

Right now, so many businesses are struggling because as they have adapted to hybrid schedules, they are wasting money on space they no longer need. And the last thing any company needs as we enter a recession is another hole at the bottom of the bucket.  

Layoffs only stand to further compound the underutilized space issue. If you already have an underused office, cutting your workforce will only leave you with more wasted space. So, while companies may save initially, it’s a specious fix. You’ll essentially be overpaying even more for properties that are even further than your ideal space utilization. Rather than cut your numbers, analyze where there is inefficiency in your portfolio and capitalize on it. 

While layoffs may be an inevitable part of a recession, commercial real estate is typically your top cost behind payroll. So smart CRE moves can save millions and in the process, possibly limit layoffs. 

How Corporate Tenants Should Take Action Now   

With investor dollars at stake and recession rumors swirling, the emphasis on CRE spending is more important than ever. Any organization can benefit from making their CRE a more efficient expense, especially now. With skyrocketing inflation, wasted money adds up…. Fast. 

So, position your portfolio to weather the storm. Corporate tenants have the power to reduce spending by getting tighter with their utilization metrics, renegotiating the terms and prices of their leases, and relocating to more business-friendly areas.  

Never forget that when things seem dim, circumstances can become opportunistic. 

That means that this CRE slowdown highlighted by Blackstone, doesn’t represent the end of the field, but a chance for certain tenants to take advantage of the power swing. 

Like discussed, the overall lower demand for real estate and waning investor interest means that landlords are in a tight position. They are forced to compete for the lowest rates in order to become an attractive enough prospect for corporate tenants. So, if you negotiate right, you can slash your CRE costs as we enter a recession, and who will look like a hero to your company then? That is why there is no room to take any chances.  

The team of true Tenant Reps at iOptimize Realty^®, can make this a reality. As negotiation experts, they have the background to go head-to-head with your landlord and their broker. They are prepared to skillfully leverage the value of your tenancy against market benchmarks and comparable sites. All said and done, you can save millions on your corporate real estate- and you won’t even need to lift a finger. Talk to a Tenant Rep at iOptimize Realty^® today to learn how to make it happen.