Did the Commercial Real Estate Market Respond to the Pandemic as Expected?
When the pandemic lockdowns occurred in March of 2020, working remotely, and ordering online became the new normal. These changes were expected to immediately and significantly change the commercial real estate market, with lenders and investors bracing for problems. At that time, most lenders expected problems with downtown office space and retail/service space, but no one was sure how far reaching the commercial real estate problems would be and how long they would last.
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The initial changes in response to the shutdowns were not as dramatic as expected, because lenders were granting payment deferrals while companies sorted themselves out, and the liquidity the government pumped into the economy via the Payroll Protection Program (“PPP”) loans allowed businesses to continue to meet rent obligations. Cash was available for investment and many investors considered opportunistic real estate purchases.
Two years into the pandemic world, it is interesting to consider commercial real estate trends today.
Real Capital Analytics reports that in 2021 commercial real estate transactions reached $809 billion, compared to $600 billion in 2019 and $400 billion in 2020. The areas of growth in commercial real estate have been warehousing and logistics properties, multifamily investment properties, and hotels and resorts. The trends pushing these sectors include the move toward ecommerce, pent up demand for travel, and rising single family home prices.
Green Street Advisors publishes their Green Street Commercial Property Price Index© (“CPPI”) monthly with prices indexed to 100 in August of 2007. The CPPI graph shows the pricing impact of the 2008 recession, when prices dropped back to 2004 levels and did not recover to the pre-recession level until 2013. The graph also shows the immediate pricing impact of the pandemic shutdowns in March of 2020. Prices reached their lowest level in mid-2020 but recovered to the pre-pandemic levels by August of 2021. The July 2020 CPPI value was 120.1, compared to an April 2022 level of 155.0.
This data shows the commercial real estate market and property values are generally strong.
On a quarterly basis, the St Louis Fed publishes commercial real estate price trends for the US. This graph shows the percent change from a year ago, not seasonally adjusted. As with the previous graph, the impact of the 2008 recession is clear and that recessionary impact was prolonged. The pandemic impact pushed the index below 0%, but only for Q3 of 2020. While this data is not yet available for the second half of 2021 and for Q1 of 2022, the graph does show the pandemic impact was short term and values have recovered.
International Monetary Fund, Commercial Real Estate Prices for United States [COMREPUSQ159N], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/COMREPUSQ159N, April 27, 2022.
According to Green Street’s data the self-storage, industrial, and manufactured home park properties experienced the highest growth in value at 69%, 53% and 34%, respectively, when compared to pre-Covid levels. Mall and office sectors showed a negative growth when compared to pre-Covid levels at -3% and -4%, respectively.
Within all this data it is important to consider certain trends that impact the value of a specific property. The factors that appear to have the most impact are related to location and potential uses for the property.
When evaluating the value of a specific property consider the following:
Suburban office space has been less volatile, though new lease terms have trended shorter.
The remote work and hybrid work environment have reduced footprint requirements.
Downtown crime has impacted personal and business safety in specific regions, which has impacted values in specific areas.
There is a trend toward multifamily housing, which has made some downtown office buildings attractive for renovation.
The ecommerce trends have impacted retail, and even grocery has now been impacted.
According to a Statista survey of 2,500 consumers, 47% of Americans buy their groceries online sometimes, with 15% shopping mostly or exclusively online.
With 77% of the online shoppers typically shopping at the big box stores such as Costco, Walmart, or Kroger.
The ecommerce trends have increased the need for logistics and distribution facilities.
The ordering of goods online and delivery of goods for pick up at new style store locations has changed the retail footprint.
Malls have been losing popularity since before the pandemic and many are being purchased to repurpose the space.
Funds are available to put to work in purchasing and renovating or repurposing space.
In summary, the overall real estate market was not as negatively impacted as originally expected when the Covid-19 lockdowns first occurred. However, there are specific winners and losers within the commercial real estate market. Understanding the specific property, including location and potential uses, is the most important consideration when developing value assessments.
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