Real Estate Investing

Commercial real estate shows record growth as pandemic recovery picks up speed

The starkest months of the coronavirus pandemic presented a sobering view of commercial real estate in the United States, with plummeting values across lynchpin sectors such as office buildings, hotels and malls that historically have been key investment properties.

Other sectors saw significant growth during 2020 that was directly driven by the realities of such unprecedented circumstances, which required mobilization to keep the economy running. Warehouse and distribution centers have ridden the e-commerce wave, while data centers and self-storage facilities have become prime investments for an economy undergoing major structural transitions with unclear timetables.

Early in 2021, optimism about the recovery of commercial real estate was dampened by the emergence of the delta variant, which prolonged pandemic precautions and came with new set of uncertainties about how to effectively contain COVID-19 in the long-run.

New third quarter data reported this week by the Wall Street Journal shows that behind all the concerns about traditional commercial sectors, there has been record growth in several others that should dispel some fears of a sluggish recovery — and then some.

Purchases of apartment buildings, life science labs and industrial properties surged to $193 billion in the third quarter, a 19% improvement over the same three months during the pre-pandemic period in 2019. It’s the biggest quarter for commercial real estate property sales ever, according to data firm Real Capital Analytics.

For the first nine months of 2021, commercial real estate sales activity was up 10% from the same period in 2019, reaching $462.1 billion.

What’s especially impressive about this trend is that it has offset declining sales among office buildings and shopping centers, which usually are fundamental pieces of any commercial boom.

Another unique feature of the current boom is that many of this year’s deals are for single properties, as opposed to big portfolio acquisitions by large investors.

The Wall Street Journal reports that part of the run on these properties is that they are returning higher yields than the bond market, which isn’t hitting its targets.

Hard-hit properties such as malls and hotels have continued to see their values fall from pre-pandemic levels, as have office buildings.

Yet demand has been so great for warehouses and multifamily properties that the commercial sector has withstood those concerning losses in its core areas. Compared to the period before the pandemic, warehouses have increased in value by 41% and multifamily property values have grown by 19%, according to the report.

The multifamily sector, in particular, grew at a faster rate than any other commercial class in the third quarter. These properties have become more valuable as the residential real estate market, with its high prices and limited supply, continues to keep would-be buyers out of the market.

The strong third quarter numbers are an encouraging sign for the market as a whole, but also may be a signal of upcoming improvements in the office, hotel and shopping sectors.

The recovery may be working in reverse, to a degree, but as long as pandemic conditions continue to trend in the right direction, the holding patterns that have characterized this period should gradually remove some of the pressures and concerns that have kept these markets down.

Greg Englesbe, GE Real Estate Consulting

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