Fall Forecast: Interest Rates, Election to Impact Office, Industrial Markets

As Labor Day fades, the focus remains on high interest rates and their impact on the U.S. and Canadian commercial real estate (CRE) sectors. While the U.S. Federal Reserve has (so far) held firm on rates this year, Canada’s central bank has made a few cuts. A question looms for U.S. real estate professionals at the time of this writing: Will the US Federal Reserve finally cut rates, and if so, how significantly?

High interest rates have strained the CRE market by increasing borrowing costs and slowing new construction. Meanwhile, the upcoming U.S. presidential election adds another layer of uncertainty, as candidates' economic policies could reshape the market heading into 2025.

Caution dominates the outlook, with CRE stakeholders paying close attention to broader economic factors. Leading SIOR members suggest that a rate cut could stimulate market activity, particularly in the industrial sector, where demand remains robust despite supply chain issues and fluctuating vacancy rates. Meanwhile, high interest rates have curtailed speculative developments in the office market in recent years. 

Silicon Valley’s Industrial Market: A Resilient Sector

In Silicon Valley, the industrial market shows stability, driven by demand from advanced manufacturing and green tech companies. Edward Hofer, SIOR , executive vice president at Colliers, says the region’s technology-driven tenant base has helped shield it from broader economic downturns.

“Silicon Valley has fared better than other parts of the Bay Area due to our large base of tenants in advanced manufacturing,” Hofer says. However, he stresses that the market would benefit from a lower interest rate environment, which would act as a catalyst for growth. “A lower interest rate environment is the best thing for any type of real estate. So, we are hopeful that we’ll see a rate cut, which will encourage growth on both the user and developer sides of the market,” Hofer says.

The high cost of capital has stalled speculative developments in Silicon Valley. Developers remain in “wait and see” mode, awaiting more favorable financing conditions. “We have several projects entitled or in the process of wrapping up entitlements, but they’re on the sidelines,” he says. A rate reduction could be the turning point for many projects, potentially revitalizing growth in the region.

Omaha Struggles with New Construction

Omaha’s industrial market, similarly constrained by high financing costs, has seen a shortage of speculative development. Kevin J. Stratman, CCIM, SIOR , from Investors Realty in Omaha, says the lack of new construction has created bottlenecks in the market.

“The lack of new construction has really put a strain on the Omaha market, where we see so much pent-up demand for space,” Stratman says. While he believes lower interest rates could help, developers will remain selective about where they build. High land costs and regional competition could drive tenants to explore alternative markets. If construction delays continue, Omaha might face a shortage of available industrial space by 2025, he says.

Pittsburgh: A Market in Transition

In Pittsburgh, e-commerce and robotics are driving industrial deals in 2024, but high interest rates have created significant barriers for developers. Michael Connor, SIOR , SIOR, market leader at Hanna CRE, notes that resurgent transaction volumes in the smaller to mid-size industrial sector may not be sustainable on a longer term basis, unless borrowing costs start to fall.

Connor also highlights the growing impact of workplace culture on the office market, noting how companies have become more focused on perks like free parking, midyear raises, and on-site amenities to attract talent. “We’ve seen companies double in size during the pandemic by offering these perks,” Connor says. And while high interest rates have limited new office developments, this has stabilized a market already struggling with high vacancy rates. By restricting the flow of new office space, these rates have paradoxically helped keep vacancy rates from rising further.

Tampa’s Mixed Market Dynamics

In Tampa, Matt Sultenfuss, SIOR , managing partner at Avocat Group, has observed slower leasing activity, particularly for larger office spaces. But he is still bullish on the Tampa market through the end of 2024.

“Larger office spaces face higher vacancy rates and slower absorption,” Sultenfuss says, attributing the decline to pandemic-induced shifts in working patterns. Hybrid and remote work models have led companies to reduce their overall space needs, hitting the market hard.

Despite these challenges, Sultenfuss believes technology and health care will continue to drive demand for smaller office spaces this fall, as these industries require flexible environments to support their growth through 2024. On the industrial side, while vacancy rates have risen to 5.7% and leasing activity has slowed for larger spaces, he predicts that build-to-suit projects and pre-leased buildings will drive future absorption.

Toronto: A Tale of Two Markets

Toronto’s industrial market will remain strong, despite signs of normalization. Matt D'Orsay, SIOR , managing director at d’Orsay + co., says that while the market has slowed from its pandemic peak, it is still performing well by historical standards. “Toronto’s industrial market is stabilizing, but vacancy rates remain low, and demand for space is strong,” D’Orsay says.

In contrast, Toronto’s office market is grappling with higher vacancy rates as businesses downsize in response to the growing trend of hybrid work. Companies are opting for smaller, high-quality spaces in prime locations rather than maintaining large, underutilized office footprints. “The office market is fundamentally changing,” D’Orsay says. “We’ve seen clients terminate large leases and downsize dramatically as they adjust to new ways of working.”

D’Orsay believes that automation and operational efficiencies will continue to be key drivers of growth in the industrial sector. “Clients are investing more in automation to mitigate future disruptions,” he says, emphasizing the importance of long-term lease commitments in this competitive market.

Both the U.S. and Canadian CRE markets face uncertainty, with fluctuating interest rates and the looming U.S. presidential election playing critical roles. The industrial sector continues to demonstrate resilience, while the office market grapples with post-pandemic shifts and high vacancy rates. Only one thing seems guaranteed – that the last four months of 2024 will be an eventful period in terms of economic and political changes. 

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