Expectations of Strong Post-COVID Recovery Bolster Competition for Commercial Real Estate Assets | Think Realty

Pricing remains a challenge.

Several factors point to an economy that is firmly on the rise as a critical mass of the US population is being vaccinated. Stimulus checks have boosted personal savings, consumption has risen to record levels, and the resurgence of air travel suggests that business and leisure travelers alike are on the move again. Many expect this economic tailwind to boost commercial real estate fundamentals, fuel speculation about a recovery and boost buyer activity. Conversely, the recovery has so far been uneven, with some cities, states and property types outpacing others and generating a wide range of valuation trends. Many investors remain on hold waiting for additional clarity before selling, which hinders the flow of marketable inventory. This has exacerbated the expectation gap between buyers and sellers in many markets.

Competitive bids encourage the compression of the cap rate.

Since the beginning of the health crisis, private investors have been a driving force behind commercial property sales, which in times of extreme uncertainty account for more than half of the US dollar commercial property sales. Buyers have been most aggressively focused on assets that have weathered the pandemic best, including industrial, multi-family and self-storage properties. Investors have also targeted property types that are expected to recover quickly after the crisis, such as hotels, as well as certain types of retail and senior housing. While some discounting has been applied in special situations, valuations of most asset types have largely held up as strong buyer interest coincides with limited sales inventory.

Industrial investors expect robust prospects.

Alignment with steady e-commerce growth, increased storage of safety stocks, and the prospect of a revival in imports and exports have all fueled industrial investors’ optimism. Although the caps fluctuate widely depending on the market, property year and numerous other factors, they were favored by downward pressure prior to the pandemic. Over the past year this trend has gained momentum, raising prices and lowering yields. Infill locations remain a prime target for private investors, while institutional funds have preferred larger assets with high quality leases in ports and intermodal hub metros.

Multi-family prices are higher than before the pandemic.

In numerous markets, well-performing residential properties have achieved prices above pre-pandemic levels. Although some sub-markets in some metropolises continue to struggle with weakened fundamentals, which are depressing the values, optimistic investors are in many cases drawing a strong recovery in 2021. Large primary markets were set back the most with a rent decline of 3.6 percent compared to the previous year. but rates on the secondary and tertiary markets rose 1.6 percent. The difference in performance reflects migration trends driven by both the pandemic and the aging of the millennial generation. Half of Millennials are 30 years or older, having frequent family years, which is driving demand for larger, more affordable housing outside of the city center. Workforce housing will likely have the strongest housing demand, but as jobs reopen, Class A homes will also see a recovery in demand. The collage of positive forecasts increased investor optimism and fueled demand for acquisitions, but current trends have also convinced some potential sellers to hold onto assets longer. Strong buyer interest has aligned with reluctant seller activity to aid the price hike and cap rate compression, pushing the nationwide average cap rate below the low 5 percent range.

The retail sector is faced with large price differences.

Investor demand for single-tenant properties that show sustainable performance during the pandemic, such as discount stores, drug stores and fast-food restaurants, remains high. This preserves the price dynamics and the compression of the cap rate. Prices vary, of course, depending on the length of the lease, the location of the property, and numerous other factors, but the average overall cap has dropped to the low of 6 percent. Shopping centers with food anchoring in growing sub-markets are also being pursued by investors and are driving the cap rates of these assets to 6 to 8 percent depending on the tenant profile, payment behavior and location. Buyers remain cautious about multi-tenant and single-tenant spaces that depend on weekday pedestrian traffic or close social interactions. However, a revival is beginning for this type of property as states reopen their economies. In underperforming properties, an imbalance between supply and demand inhibits sales.

Uncertainty is holding back office investor activity.

Office buildings continue to face unclear demand prospects as more and more companies take steps to curb remote working. Assets in first-tier walk-in suburbs with a strong rental profile have attracted the most attention from investors, and prices in emerging markets may be above pre-pandemic levels. Urban office towers still face several hurdles to resume all staff, such as: B. the fear of public transport or overcrowded elevators. Because of these obstacles, cap rates across the office sector have remained stable, on average, in the low range of 7 percent. Medical offices, on the other hand, have more clarity about long-term demand, which can keep investors interested. The cap rates for recent trades on these assets have fallen to just below their historical average of 7 percent.

The cap rates for commercial real estate offer convincing margins.

Many investors expected the health crisis to precede a wave of price discounts, but this outcome is less common as the country’s health situation has improved. The limited number of assets marketed has instead supported the rise in prices and the decrease in the cap rate in regions with positive growth prospects. Although returns have declined, the margin remains high compared to low-risk alternative investment vehicles as interest rates are still historically low. As the economy reopens, the demand profiles for commercial property are strengthening, and this anticipated momentum is causing commercial property prices to rise in most markets and property types.

John Chang is the National Director of Research Services for Marcus & Millichap. He is responsible for producing the company’s extensive commercial real estate research publications, tools, and services. Under his leadership, Marcus & Millichap has grown to become a premier source of market analysis, insights and forecasting, and the company’s research is regularly cited across the industry and mainstream business media.
John leads a team of dedicated real estate research professionals who create the company’s 1,000+ annual research publications and conference presentations. These detailed reports, analyzes, and presentations integrate economic and financial market trends with insights into all major commercial property types including: hotels, industrial, prefabricated houses, apartment buildings, offices, medical practices, multi-tenant retail, single-tenant retail, self-storage, and senior housing.
John is a seasoned industry analyst who has been cited in numerous publications and is an active member of the NMHC Research Foundation Advisory Committee, the ICSC North American Research Task Force, and the NAIOP Research Foundation. He regularly presents at a variety of conferences and events hosted by industry-leading organizations such as NMHC, NAIOP, ULI, CCIM, ICSC, SSA, and numerous others.
John joined Marcus & Millichap in April 1997 as Research Manager in the Seattle office. After holding senior marketing and e-business positions with leading residential real estate companies in the Pacific Northwest, he returned to Marcus & Millichap in November 2007 as Head of Research Services. John was elected vice president in 2010, first vice president in 2013, and senior vice president in 2018.