While most erosion in value has already occurred, more is expected albeit at a lower rate, he suggested: “We feel there could be another 5% to 7% decrease as a possibility. The market still needs more clarity in terms of how high the Fed will go, for how long, and exactly how that’s going to play out in the broader economy in order to fully reprice.”
Things will shape up after the first quarter, Mellott said: “We believe that picture will become clearer in the second quarter. Initially as the economy slows, long-term rates are likely to decrease and we may see pressure on spreads, which will incrementally lower the cost of capital. So, in the short-term, we see short-term headwinds, but we also expect to see a basis for recovery in the second half of the year.”
The office space has changed
The office sector has also seen its share of changes, with more to come.
A recent CBRE assessment showed that with fewer employees regularly in the office, many companies are lowering their office size requirements. Although the number of US office leases in the first three quarters of 2022 was 14% higher than the pre-pandemic (2018/2019) average, total square footage leased was down by 4%. The number of small leases (10,000 to 20,000sq ft) increased by 32%, while those for spaces of 100,000sq ft. or more decreased by 17%. The increase in smaller leases this year reduced the average lease size by 18% compared with the pre-pandemic average.
Over the same period, leases for between 50,000 square feet and 100,000 square feet fell by 16%, while those for between 20,000 square feet and 50,000 square feet grew by 6%.