Last week, the software industry saw a market rout as investors questioned whether the firms operating in the space could weather AI disruption. 

While it initially seemed that the sell-offs were contained to software firms, real estate firms experienced a market rout as well as investor fears flooded the sector. 

Investor skepticism in commercial real estate stems from worries that AI disruption could lead to layoffs, leading to shrinking demand for office spaces. Moreover, there are fears that the office leasing process would be automated as well.

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Software firms have been in the midst of an investor sell-off as of late due to concerns surrounding AI and its potential to disrupt the industry as a whole.

Investor anxiety regarding the sector came about as AI tools like Anthropic’s Claude added features that could automate industry-specific workloads that required specialized software.

And now, it seems this AI-induced rout isn’t limited to the software industry.

Last week, the stocks in the commercial real estate sector tumbled as well.

Real estate broker CBRE saw its stock decline by as much as 9%, while Jones Lang LaSalle tumbled and Hudson Pacific Properties saw their shares dip 7.6% and 4%, respectively.

This wave of sell-offs amid investor concerns about the sector’s exposure to AI disruption.

The commercial real estate market has been squeezed by higher interest rates and the rise of remote and hybrid working setups in recent years. 

Vacancy rates in America’s top metros rose steadily from 17.5% in 2020 to 20% as of Q2 2024. Meanwhile, the Fed hiked rates 11 consecutive times from May 2022 to July 2023.

After holding steady for most of 2024, rates began sliding downwards in September 2024. With easing continuing into 2025, as rates reached 4.5% before a subsequent rounds of cuts in September, October, and December of last year further lowered interest rates to 3.75%.

However, falling interest rates alone haven’t been able to turn around this industry.

This is because investors are wary of AI’s potential to replace the need for labor-intensive jobs like real estate brokerage, which can theoretically be automated away with AI.

These recent sell-offs in the sector come despite expectations that real estate will remain strong this year according to some analysts.

In fact, CBRE CEO Bob Sulentic even pushed back against the negative sentiment surrounding real estate as of late, saying that the transactions his firm works on are complex and requires a deep knowledge of the field and a wide range of relationships.

Time will tell whether these fears are overblown. Until then, investors should exercise caution and moderation.

Bull markets tend to see dips in various sectors throughout its duration so investors shouldn’t panic when a sell-off occurs. 

That said, the nature of this AI-driven bull run requires investors to assess both the benefits and risks AI poses before investing money in a stock.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research