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Commercial Real Estate Trends And The Call For Creativity

The ripple effect of the pandemic’s impact on the commercial real estate (CRE) market is going to have a lasting effect on several market sectors. The remote workforce genie isn’t going back in the bottle, and the reliance on e-commerce and advances in technology for home delivery will continue to disrupt retail. However, there is reason for optimism, but not across all sectors, and there’s still a lot of emperors without clothes out there talking about how everything is going to be just fine. There are thriving CRE sectors, some that need only pivot to adjust to the new normal, and others that will have to completely reinvent themselves.

Multifamily Real Estate: On The Rebound

As a leader in providing property management technology to the apartment industry, my company has seen firsthand how the multifamily real estate market has made a faster recovery than expected compared with other real estate sectors. It’s arguable that some markets felt almost no impact at all, and some sectors are actually stronger coming out of the lockdown. Yes, government aid has helped, but the overall market has gotten back on its feet quickly and will continue to do so in 2022. The multifamily market is seeing strong growth with low vacancies, steady rental rates and robust development for next year.

Investors agree: Recent data puts sales volume of market-rate apartments at $46.6 billion in the first half of 2021, which was up by 35% from a year ago. This is on pace with the average growth rate for the past five years. Apartments in secondary markets or further from major cities may benefit from this remote work trend since employees no longer need to be near their physical office location.

Industrial Real Estate: Thriving During Distress

The industrial market saw a huge boost during the pandemic due to the growth in e-commerce, and it looks like this will keep rolling through 2022. Year-over-year e-commerce growth surged to 44.5% in Q2 from 14.8% in Q1, which put pressure on retailers, wholesalers and third-party logistics companies (3PLs) to lower transportation costs. There is still healthy demand for industrial real estate, with 367.8 million square feet of industrial property under construction. Completions for 2021 are forecasted to top 250 million square feet, slightly above 2019’s total.

Rent increases were most significant in or adjacent to port areas where there was increased demand due to shipping problems exacerbating supply chain challenges. Vacancies remained steady at 6.1% compared to March 2020. Strong vacancy and rent growth figures show new space has easily been absorbed.

Office Real Estate: In Dire Trouble

Since approximately 50% of U.S. workers worked remotely during the pandemic, flexible work location is no longer a nice-to-have but often a requirement. Businesses have shifted from “always in-person” to a remote workforce, and a vast majority of that workforce likes it. In my opinion, this trend isn’t going anywhere; about 74% of the workforce is planning to permanently be working remotely. This spells a significant reduction in demand for office space. Companies are not re-upping leases and are significantly reducing their square footage, all signals of troubling trends for the CRE market. Not surprisingly, I’ve noticed that CRE owners aren’t talking about this exodus and are telling all who will listen that everyone’s coming back. They may even talk about the need for flex space but not about how flex space will require less space overall.

An overwhelming 72% of companies anticipate modest office space reductions, and 9% of large companies plan to make their office space “significantly smaller” in the next three years. Perhaps some CRE owners are working behind the curtain to stem the tide of companies leaving their buildings or designing new uses, but they have a cash crunch ahead to meet loan payments. Loans to keep CRE businesses afloat can be difficult or impossible to service because a reduction in 20% of topline revenue due to loss of tenants severely impacts a commercial loan, which is typically levered at 75-80%. Cash is only going to get tighter.

Adaptive Re-Use Will Be Key

One of the saving graces for the struggling office and retail real estate markets is the shift to a mixed-use property because apartments in a mixed-use environment command 13.9% higher rents than apartments that are not. I believe that this is the most significant opportunity in CRE and where one strong sector can bolster the struggling one.

There are a number of creative ways that CRE real estate executives can reuse a vacant structure to give a neighborhood a boost. Converting unused office space or retail buildings into apartments or nursing care facilities, for example, can make the best use of space and tap into needs in the market. You can add apartments on top of malls or earmark warehouse storage on the back of office spaces. Key factors that determine optimal reuse in a property include location, building structure, cultural significance, sustainability and ROI.

Cities and counties have also put into place adaptive re-use ordinances making permitting easier and construction easier and cheaper. In Los Angeles, for example, where my company is headquartered, CIM Group took advantage of the new adaptive re-use ordinance to renovate a downtown high-rise building.

One component to assist with the success of adaptive repurposing commercial real estate property is technology, which has grown by leaps and bounds over the course of the pandemic. Once considered a “tech-hesitant” industry, it is now embracing everything from automation software for remote property operations to AI that scans for changes in state and local code and compliance regulations. A recent survey showed that 80% of real estate owners and operators claimed new technology was already having a positive impact on their operations.

While some office building owners are awaiting a mass re-entry of people back into offices, others are thinking creatively to re-envision a future that combines the best of both worlds, solving a housing shortage and enlivening office and retail space.

 

Source:  Forbes

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CRE Has Biggest-Ever Sales Quarter

Investors purchased $193 billion in commercial real estate during the third quarter, marking a reported record that surpassed pre-pandemic spending by 19%.

Apartment buildings, life-science labs, and industrial spaces to support the e-commerce boom drove the record period, according to data from Real Capital Analytics reported by the Wall Street Journal. The report notes sales of the properties surged so much, they canceled out shrinking office and retail markets and defied dire predictions of the sector’s crash.

The record period is part of a record year for the sector. The Journal reports sales in the first nine months of the year hit $462 billion, 10 percent more than the same time in 2019 and the highest of the same period from any other year.

Investors in commercial real estate previously outpaced pre-pandemic figures in the second quarter, spending $144.7 billion. This marks almost triple the purchases in 2020, but $50 billion less than the most recent purchases.

Data and analytics firm Green Street’s index for tracking property owned by REITs also showed a surge in activity. According to the Journal, the index is up almost 22 percent from its pandemic nadir and 8 percent from pre-pandemic times.

The boom is largely fueled by investors snagging a large number of single properties in a multitude of deals, rather than previous booms featuring plentiful portfolio sales, or sales of entire companies.

Green Street data show the hot commercial real estate market is being paced by industrial real estate and the multifamily market. The Journal reports that the industrial market has soared 41 percent in value since before the pandemic, while the multifamily market has seen a 19 percent increase in value.

The industrial market hit several records in the last quarter, including an all-time low in vacancy and record highs in net absorption and average asking rents.

In addition to new deals, developers in the space are setting records this year. A record 521.4 million square feet of space was under construction in the third quarter and approximately 340 million square feet is slated for delivery this year.

However, the surges in activity aren’t being felt universally across all parts of the industry. According to Green Street data, the value of shopping malls are down 13 percent during the pandemic, while the values of hotels have dropped 4.2 percent and office buildings have dropped 5.6 percent.

 

Source:  The Real Deal

 

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CRE Momentum To Continue Into 2020

The market for commercial real estate from occupiers and investors has continued to be relatively flat overall in the third quarter.

The latest Commercial Property Monitor from international real estate body RICS reveals generally solid conditions for the office and industrial sectors but retail continues to have a tough time as the shift to online shopping remains. Interest from occupiers and investors in retail declined in Q3 2019.

For the coming year though, retail should see a modest uptick, while office and industrial sectors look likely to see strong gains, especially in prime markets.

“While there is an industry-wide effort to invest in and transform real estate for a more connected and sustainable future, these innovations in how people live, work and play aren’t yet the standard, especially outside prime markets,” said Neil Shah, Managing Director for RICS in the Americas. “What this means for the overall retail sector is continued underperformance, particularly in secondary markets, in comparison to the office and industrial spaces.”

Capital Projections

Capital value projections over 12 months are positive for all sectors apart from retail, although for industrial the projections have cooled despite ongoing sentiment.

“Real estate leaders are increasingly believing that, after a protracted period of growth, the market is now approaching the top of the cycle,” said Tarrant Parsons, Economist with RICS. “While indicators are still generally solid for other sectors, the troubles in the retail sector show no signs of abating. The downward demand trends, particularly in secondary locations, is likely to result in a significant decline in capital values over the year to come.”

Survey respondents were asked to compare conditions over the latest three months with the previous three months, as well as their views on the overall market outlook.

 

Source: Mortgage Professional America

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