The leader of the world's largest real estate services firm and his team are preparing for an even deeper decline in property values than previously expected as interest rates stay elevated.
That drop, expected to be the most acute in office buildings, is being driven by high interest rates and capital not being available, Bob Sulentic, president and CEO of CBRE, told the crowd at a Dallas Regional Chamber luncheon Thursday at the Fairmont hotel in downtown Dallas.
"We thought values would come down 15% to 20% and we now think that they may be another 10%," Sulentic said. "We also think that's going to stabilize as we get into the middle of next year, that interest rates will come down. When interest rates come down and availability of debt is more of a certain thing, we think the capital will come back into the market and valuations will go back up and assets will trade again."
Lack of trading in the capital markets and large companies holding off on signing big office leases were top of mind during Dallas-based CBRE's earnings call in October. Still, Sulentic said this isn't the worst economic cycle he has seen.
"This is not like the Great Financial Crisis, this is not like what we saw in the 1990s; it's more like, in my mind, when we saw the dot-com bubble burst," Sulentic said, adding there is no current recession to discuss.
The challenges to the commercial real estate industry are purely tied to the uncertainty surrounding capital, he said.
"The property owners and lenders are all struggling with the same thing, which is uncertainty about values and uncertainty about where interest rates are going to settle out," he said. "When that happens, and I know there's a lot of people in our industry here, it's not like these things go away forever. The buildings are still there, and the base of buildings is still growing and growing as the global economy grows. They have just stopped trading for a while. When the capital comes back, the assets will start trading again."
Office buildings have been particularly hit hard by the capital crunch with a shift in how the properties are utilized. Sulentic, who said he returned to work in the office in August 2020, noted he believes "we will be in the office less" than how offices have been historically utilized — equating to between 20% and 25% less utilization, depending on a company's decision on hybrid or remote work.
For companies wanting to bring employees back to the office, Sulentic said office buildings offering an experience are the first ones to lease in this ever-changing world. Lower-quality office buildings without walkable amenities or experiential areas are the ones that remain challenged in this environment, he said.