By CHUCK GREEN
While climbing interest rates are throwing a monkey wrench in the U.S. economy, commercial real estate – at least in the short term – seems to be looking up.
In a recent address to the 2022 REALTORS Legislative Meetings’ Commercial Economic Issues and Trends Forum, NAR Chief Economist Lawrence Yun said regardless of burgeoning rates, the commercial real estate market is expected to prosper.
“Outside of the office sector, which is lagging behind as employers allow increased remote work flexibility to keep and attract talent, commercial real estate continues to strengthen,” Yun said.
Apparently shucking aside setbacks in light of the 2020 and 2021 pandemic, heading into this year conditions were looking up for the commercial real estate industry, said Al Brooks, Head of JP Morgan Chase Commercial Real Estate, according to JP Morgan and originally published by Commercial Observer.
This year, fueled by hefty economic growth and hearty investor and tenant demands, the US commercial real estate market’s will continue to come up aces, according to crexi.com. There likely will be no let-up in investment activity as plenty of worldwide capital will fuel commercial real estate values with investors on the prey for yield.
Among the asset classes, the industrial space, especially, appears to be running on all cylinders, with Yun characterizing the sector as “booming.”
Stemming from the transition to “just-in-case” inventory buildup in light of the boom in wholesales inventories, he continued, the industrial property market’s capturing a “second wind.”
“Even as ecommerce appears to have hit a wall post-Covid, there’s likely a tailwind from a desire to rebuild inventories,” Michael Knott, Director of U.S. REIT Research at Green Street told The Mortgage Note.
Knott said this will benefit industrial properties, but with Amazon admitting it overinvested in logistics capacity, it has been an ‘Oh, crud’ moment for industrial – “at least judging by the public market’s swift deliverance of punishment.”
Industrial assets had been priced “perfectly, with strong rent growth coming from ecommerce expansion, better brick-and-mortar retail sales, and a future tailwind from inventory,” Knott said.
Knott added that, “one of the key legs of the stool has now been seemingly kicked out, so investors are on watch for signs that the rosy rent growth picture has deteriorated.”
“Although there were some surprises and overly negative forecasts surrounding retail and office commercial real estate markets, industrial continues to perform well,” Brooks noted, according to JP Morgan.
The industrial real estate market experienced another period of unprecedented activity during this year’s first quarter, while the national vacancy rate is at 4.1%, according to planetmoran.com.
That’s among the lowest ever recorded.
Meanwhile, in Q1 this year, there was an uptick of rent growth of 9.9% — an increase of almost 2% from Q4 2021.
Further, ground’s being broken nationwide at a record clip by developers on new constriction to the time of 580 million square feet now under construction, the site also stated.
Retail’s “turning positive,” Yun noted.
The retail sector’s now bouncing back, persevering through massive pandemic-induced disruption, according to benchmarkcorporate.com.
Due to a scarcity of the construction of stores and parachuting retail sales, there’s been an improvement in sales per square foot.
Despite setbacks of their own, malls are again attracting customers, culminating in sales growth of double digits, they reported.
Victor Calanog, Head of CRE Economics for Moody’s Analytics said the impact of e-commerce on brick and mortar’s been overstated, according to JP Morgan.
“People continue to go to restaurants, get haircuts and buy goods and services in person,” Calanog said.
Although retail vacancies ticked downward by 20 basis points throughout 2021, they remained elevated at around 10.4%, he explained.
Retail’s doing well following a lull in performance pre-Covid, observed Knott.
“Well-located strip centers seem to be a low-growth but steady way to play the retail game,” Knott said.
High-quality malls enjoyed a strong 2021 and are generating leasing levels above 2019 trends.
The office sector is still dealing with challenges.
The good news is that not all markets are identical.
“While the overall office market is wobbly, some variance exists depending on location. We’ve seen improvement in some midsize markets as companies seek more affordable office locations away from major U.S. cities,” Yun said.
Probably not unexpectedly, the increase of those working from home is influencing this sector.
Compared to prior to the pandemic, the deepest plummet in sales transactions was experienced in the office sector, with major investors tamping down – if not eliminating — their holdings in office assets, according to benckmark.com.
While a return to the office by employees is preferred by many companies, most employees are showing a high level of productivity remotely; meaning, down the line, a swath of employers won’t need as much space to lease per worker.
“Office is struggling amid the unofficial rewriting of the grand bargain between employers and employees,” said Knott.
Leaders at Jones Lang Lasalle are more upbeat about the office sector. They are a national company that buys, builds, occupies, and invests in a variety of assets including industrial, commercial, retail, residential and hotel real estate.
Their clients span industries including banking, energy, healthcare, law, life sciences, manufacturing, and technology, according to their website.
An official told The Mortgage Note that the company’s Office Research team saw an uptick in office leasing velocity, with volume up +5.4% in Q1 2022.
Leasing velocity is now exceeding pre-pandemic levels in hot markets, such as Austin, Nashville, Denver, Salt Lake, and San Diego. Those markets, plus Miami, are experiencing positive net absorption, the official indicated.
Whatever the case, while offices might get a different look, they won’t close, according to Forbes.com.
“Despite what headlines may say, the physical office is by no means dead — it is looking to upgrade, though,” said Dan Rosenbloom, Managing Director, Head of Investments at Cadre. “While the office market contends with its highest vacancy in recent decades, investors can expect to see occupancy and rent growth stabilize this year,” the site stated.
In fact, Knott said quality office building will continue to win market share from commodity offerings, which he characterized as “a firm pre-Covid trend that’s even more pronounced today.”
Read More Articles By Chuck Green:
Housing Bubble: Clickbait Or Is There A Bumpy Ride Ahead?
Job Cuts Hit The Mortgage Industry
Office Space Vacancies Monitored Closely As Numbers Begin To Fall
Email story ideas to Editor Kimberley Haas: [email protected]