Bright Spots Amid Commercial Real Estate Struggles
The office market continues to grapple with pandemic fallout, but investors find attractive deals in retail, industrial and hotel sectors.
The landscape for commercial real estate may look dismal from afar with high interest rates and an office space market still in shakeout mode, but pockets of opportunity remain for investors with the right approach and strategy.
Some — but by no means all — commercial real estate segments (particularly the office market) bore the brunt of the post-COVID upheaval. Even prime properties have seen ratings downgrades. Community and regional banks have been reluctant to enter the space as bank regulators and rating agencies keep a keen eye on exposure to deals on shaky footing.
But in spite of those developments, there are categories that look attractive for investors, including the retail, industrial and hotel sectors.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Major fund sponsors are creating new vehicles for investment. Sellers are accepting deals they wouldn’t have considered a year or even six months ago. The seemingly unyielding rise in interest rates may be coming to an end, considering Fed officials’ recent comments.
“Hot” markets such as Austin and Phoenix are still relatively highly valued and probably best avoided. But potential returns are inviting in some smaller markets like San Antonio, Albuquerque, Birmingham and Tulsa.
Some long-term opportunities
There are some good long-term opportunities, too, in the Northeast and Midwest. Milwaukee and Detroit have stabilized. Minneapolis has a stable of Fortune 500 companies, a strong university presence and a great recreational market, making it an interesting prospect. Indianapolis is among the Rust Belt communities seeing growth with what appears to be a resilient economy that is home to several companies with staying power.
Boston, Philadelphia and Atlanta have diverse business bases, as does Washington, D.C., which is also getting Amazon’s HQ2 and has the federal government ordering workers back to the office. Newark, N.J., still gets a lot of bad press, but the logistics and industrial market there is second to none.
Still, there aren’t shiny deals under every rock. Lenders won’t touch San Francisco, for example. The city has lost a material portion of its talent base, and the appeal of its natural beauty has waned in view of other detractions. It’s going to take a lot to bring the city back.
Financing and interest rates are a hurdle
More broadly, despite the opportunities and the easing of rising interest rates, financing remains a hurdle. When debt isn’t available, a potential buyer needs to find a seller that’s willing to carry the mortgage while the property is leased, renovated or otherwise set up to make money. It’s going to take creative financing to make the market come back to full health.
A buyer who is fiscally prudent on the management side — that means not spending money on amenities that have no value to a tenant — and a reasonable medium- to long-term view on real estate will be able to find deals that generate positive cash flow, even before tax benefits.
There remains a great deal of uncertainty and turbulence in the commercial real estate sector. As the bottom fell out of the office market, rates were changing so fast people couldn’t figure out what buildings were worth.
But by this time next year, it should be clear that cap rates and yields have peaked. Property values are very likely to rise, and many investors will wish they had been more aggressive. Those who did buy will be able to refinance and see respectable returns.
Be aware, too, there are new complexities. Artificial intelligence, for example, will be a game changer for real estate just as it will be in other industries. Not only will the way properties are analyzed and managed changed — the tenants and users of buildings are likely to be changed by AI, too.
What will become of the office market?
As for the current ugly duckling: The office market will at some future point come back. Many people are finding it’s not as easy to work from home now that not everyone is doing it. Companies and bosses are fully cognizant that innovation and productivity were higher with workers gathering in proximity to one another. While versions of remote work will persist, there’s now a clear trend back to a more traditional direction.
The pandemic created a wildly distorted market, and investors are always spooked by market distortions. Some commercial real estate sectors have taken the brunt of that impact, but commercial real estate overall will continue to be a stable asset class.
And any investor who’s not searching for cash flow-positive deals is likely to regret it next year.
related content
- WFH Impact on Commercial Real Estate Market: Kiplinger Economic Forecasts
- How Commercial Real Estate Investing Can Add Balance to Your Portfolio
- REITs Unveiled: A Comprehensive Guide for Investors
- Qualified Opportunity Zones With an Energy Boost
- One Way to Stay Ahead of Inflation: Qualified Opportunity Funds
-
Tax Season 2026 Is Here: 8 Big Tax Changes to Know Before You FileTax Tips Due to several major tax rule changes, your 2025 return might feel unfamiliar even if your income looks the same.
-
The New Rules of RetirementPopular guidelines about how to save, invest and spend need to be updated and personalized to ensure you'll never run out of money.
-
Humanoid Robots Are About to be Put to the TestThe Kiplinger Letter Robot makers are in a full-on sprint to take over factories, warehouses and homes, but lofty visions of rapid adoption are outpacing the technology’s reality.
-
Don't Let a 60/40 Portfolio Derail Your Retirement: Why a Cookie-Cutter Approach Could Cost YouChoosing a personalized retirement investment plan, rather than relying on the 60/40 portfolio, could help protect your savings and ensure long-term growth.
-
Are You Winging Your Retirement Plan? A Wealth Adviser's Tips to Help Build Wealth and Navigate RiskIf you have no strategy tying together your accounts or haven't modeled scenarios to make sure your savings will last, then your plan is probably inefficient.
-
Divide and Conquer: Your Annual Financial Plan Made Easy, Courtesy of a Financial AdviserOverwhelmed by your financial to-do list? Split it into four quarters and assign each one goals that connect to the time of year. It could be life-changing.
-
High-Income But Low Confidence? This 5-Point Plan From a Financial Planner Can Fix ThatHigh earners can still feel they're on shaky ground financially. Rebuild your confidence with a plan that understands your present and protects your future.
-
Your Post-Accident Survival Guide, From an Insurance ExpertAfter a car accident, stay calm and document everything to preserve the facts. Remember: You don't have to solve the problem — that's why you have insurance.
-
3 Investment Lessons From 2025 to Help You Ride Out Any Storm in 2026Investors can use the past 12 months to guide their strategy for 2026 — and 2025 was living proof that time in the market can pay off.
-
Are You and Your Financial Adviser in Sync on Social Security?Deciding when to claim Social Security is tricky if you and your adviser haven't thoroughly covered the topic. Here's how to ensure you're on the right track.
-
How to Find the Best International Moving Company for Your Big Move Abroad (and Avoid Costly Mistakes)It's best to use an international moving company to protect your belongings and budget when relocating to another country. Here's how to find a reputable firm.
