Capital Economics sees a $480 billion wipeout in commercial real estate values next year

Commercial real estate property values will fall another 10% next year, after falling 11% this year, Capital Economics’ deputy chief property economist, Kiran Raichura, wrote in a recently released outlook for next year. The economic research firm defines the market size as more than $5 trillion, using a 2022 year-end estimate. That means the 11% decline in value this year equates to roughly $590 billion while the 10% fall expected next year equates to $480 billion. 

Some sectors, like offices, are more distressed than others. Still, net operating income growth, a property’s total revenue minus its operating costs, is set to soften further next year as the “industrial rent boom gives way to more ‘normal’ growth rates and apartment rents flatline.” Translation: Nearly all sectors face headwinds. 

Let’s start with the office sector, which isn’t simply facing the problem of elevated interest rates after an era of cheap money, but also a structural change due to the changes in how people work after the pandemic. And even with many companies pushing for a return to the office, in-office work may never be what it was. Falling revenues and rising capitalization rates that tend to translate to increased risk are behind the 15% decline in office values that Raichura and his team are predicting from next year to 2025. Capitalization rates are calculated by dividing a property’s net operating income with current market value, and is used to compare value with similar real estate assets. 

“Four years after the pandemic, and the outlook for the office sector is still the joint-worst,” he wrote, referring to the