BHI Sector Outlook - CRE and Healthcare
Within the context of recent events, we see a market in transition in commercial real estate. Generally, the market is highly focused on asset classes, location - specifically regions and related sub markets - and sponsors’ financial wherewithal to support project costs. We note that sponsors are also cautious and have been pulling back due to increased construction costs, the need for greater carry reserves, and rising interest rates that cause cost over runs and most of all, reduce the project’s overall profit margins.
Office and retail remain weak. In the office sector, the trends of hybrid and remote work resulted in more than five million square feet released to the market in the first quarter and a national vacancy rate of 19%, marking an increase for five consecutive quarters. In retail, while consumer spending has buoyed neighborhood and community shopping center performance, the sector has posted a 10% vacancy rate over the past four quarters. Even stabilized multifamily, the prior crown jewel, seems to be less robust compared to prior periods because of rising interest rates and changes in regulations. With lower demand, multifamily vacancies increased in nearly half of major metropolitan markets.
While we see a challenging outlook for these sectors going forward, there are still pockets of opportunities and some bright spots in the market. We believe residential is more influenced by demographics, with markets such as Florida and Texas particularly strong and certain submarkets in the Northeast robust. Post Covid, demand continues for both life sciences and industrial space. In addition, we see that hospitality has regained traction as travel has rebounded and there is pent up demand for leisure activities. Finally, construction in certain asset classes remains strong as those products are usually delivered 18-24 months in the future. Many believe, looking at the forward yield curve, that the future looks more promising.
We see healthcare as a growth marketplace that is less impacted than other sectors, driven by the demographics of a rising senior population which offsets some of the economic factors mentioned above. According to data from the Population Resource Bureau, the number of Americans 65 and older is projected to nearly double to 95 million by 2060, comprising 23% of the population, up from 16% in 2018. We have seen more focus on assisted living in select regions, and the demand for skilled nursing will only grow in the years ahead.
In the short term, however, the sector is facing some headwinds created by rising interest rates and current market conditions. Investors and sponsors have become more hesitant in this environment and we have seen a slowdown with sponsors less willing to carry turnarounds. While we expect these factors to remain consistent over the next few quarters, long-term, the market will continue to favor best-in-class sponsors.
CRE and Healthcare are strategic sectors for BHI and we remain committed to both these areas. We are well-capitalized, well-positioned to weather rapidly changing and volatile markets, and have the market expertise to best serve industry demands. Going forward, we are dedicated to providing ongoing support to our CRE and healthcare clients and expanding our portfolios in both areas.
BHI is the U.S. division of Bank Hapoalim B.M. Bank Hapoalim provides its clients access to a broad array of products and services available through its bank and non-bank affiliates. Not all products and services are provided by all affiliates or are available at all locations. All credit products are subject to credit approval. Nothing contained herein should be construed as a commitment to lend by BHI or any of its affiliates.