Continuing low interest rates, combined with an increasingly optimistic outlook regarding the pandemic, have fueled a rapid recovery in commercial real estate; in some sectors, sales are already outstripping pre-pandemic levels.
“Investors purchased $144.7 billion of U.S. commercial property in the second quarter [of 2021] … that was close to triple what it was in the second quarter of 2020, when the pandemic was in its early months and there was widespread investor uncertainty over its economic impact.” – Esther Fung, Wall Street Journal, July 27
Recovery rates vary between different market sectors
Demand for residential rentals remains strong and rental apartment buildings, especially those with gardens or patio space, have the largest sales volumes of all commercial real estate at $92 billion. Surging prices and fierce bidding wars in the residential home market have prevented many potential buyers from securing a property, forcing them to stay in – or join – an already competitive rental market. Properties in sun-belt cities: Dallas, Phoenix, Tampa, Atlanta, Austin, and San Antonio, for example, are particularly attractive to investors, according to Real Capital, with record volumes of sales during the first two quarters of 2021. In fact, sales in general are currently higher than pre-pandemic levels.
“Alternative sectors continue to be another bright spot. These are specialty real estate sectors, such as life sciences, healthcare facilities, senior housing, and self-storage.” – Shan Hasnat, iCapital Network, June 16, 2021
Life-science office buildings are enjoying healthy sales and attracting considerable interest from investors, especially those catering to pharmaceuticals and bio-tech, as investment in vaccines and public health soars. Residential rentals and self-storage units are also benefiting from a changing residential dynamic as more people look to move away from major cities to the suburbs, or need to store belongings as they rent while waiting to get into the housing market.
However, the recovery has not been seen across the board – with some markets currently faring far better than others. The hotel industry has understandably taken the biggest hit, along with retail – a section that was already struggling before the pandemic, with many shopping malls experiencing decreased footfall and rising rents. Several household names in retail declared bankruptcy in 2020.
Additionally, the remote working trend has meant that a large number of office buildings are still seriously underused. No more than 20% of workers have returned full time to the office, and it is quite likely that some never will. Manhattan has been one of the worst-hit areas for office properties, falling from second place in 2019 to eleventh this year. Attempts to attract workers back to the office, or encourage companies to buy or lease office space, include costly improvements such as new ventilation systems, and enhanced provision for social distancing, such as increasing the number and size of elevators and providing zoom conferencing facilities.
The National Council of Real Estate Investment Fiduciaries (NCREIF) chart below clearly indicates how hotels and retail have particularly suffered, compared with other areas of commercial real estate, in the course of the last year. At the same time, office buildings in general have seen a much slower recovery, while industrial properties, including manufacturing facilities and warehousing, have seen huge gains as a result of the surge in e-commerce.
Post-pandemic recovery compared to post-economic crash recovery
As the pandemic began to make its presence felt in the US and globally, many anticipated a depressed market in real estate – both residential and commercial – followed by a prolonged, slow recovery. This is what transpired, after all, following the 2008/2009 financial crisis. Yet, recovery this time around has been very different with many sectors bouncing back rapidly to pre-pandemic levels, if not higher. During the financial crisis, the NCREIF Property Index (NPI) fell almost 24 percent between Q2 2008 and Q2 2009 and took at least two years to recover. To compare, during Q2 of 2020, while the US GDP shrank by 31.4 percent, the NPI declined a mere 1.6 percent and recovered fully before the end of that year.
Reasons for this are twofold. Commercial real estate has proven to be remarkably resilient, partly due to stimulus programs from the federal government. Also, concerns about inflation have helped the recovery as real estate investment historically provides an excellent hedge against inflation.
As a result, confidence in commercial real estate remains high, especially when leveraging is low and there is a demonstrable need for investment in certain sectors, such as multi-family rental accommodation, industrial properties, and medical offices. With sales close to triple those in Q2 2020, and also better than they were pre-pandemic, the outlook is certainly positive.