February 2020 Commercial Real Estate Market Trends and Outlook

This latest Commercial Real Estate Trends & Outlook Report discusses trends in the small commercial market (transactions that are typically less than $2.5 million) based on a survey of commercial REALTORS® about their 2019 Q4 transactions and the latest publicly available data.

Respondents reported commercial dollar sales volume rose 4% in 2019 Q4 from one year ago, new leasing dollar volume rose 3%, and commercial development (in square feet) rose 5%.

Among respondents, the median commercial sales price growth in 2019 Q4 from one year ago was 3%. Apartment, industrial warehouse and flex, and office class A properties had the lowest cap rates, with a median of 6.5%. Among respondents, the median cap rate for retail mall properties was also 6.5%. The retail trade industry appears to be adapting to the challenge coming from robust e-commerce sales. In November 2019, the retail trade industry gained 15,300 net new jobs from one year ago, in contrast to the job losses in past months.

Respondents reported that vacancy rates were still trending downwards. Among respondents, the average commercial vacancy rate across commercial types (multi-family, industrial, retail, and hotel) was 7.3% in 2019 Q4. The lowest rental vacancy rates were in multi-family, at 4%, followed by industrial, at 5%. The highest vacancy rates were in office, at 10%, followed by retail, at 9%.

Respondents reported that construction activity (in square feet) was up 5% in 2019 Q4 from one year ago. Given the low level of interest rates, majority of respondents reported an improvement in conditions related to obtaining debt (60%) and equity financing (57%). However, only a small fraction reported an improvement pertaining to zoning regulations (33%), hiring and cost of labor (23%), and obtaining and cost of raw materials (21%).

The majority of respondents reported observing an increase in construction activity outside the central business district (73%), repurposing of retail malls (71%), senior housing (68%), transit- oriented development (67%), co-working spaces (62%), apartments with smart home technologies (58%), and Opportunity Zone Fund investments (53%).

GDP growth is likely to pick up to 2.4% in 2020 given the de-escalation of trade tensions between the United States and China. With a pickup in growth, we expect commercial sales transactions to increase 3% in 2020 and commercial prices to increases to 2%. Slightly more than half (53%) of respondents expect more commercial business transactions in the next 12 months. Vacancy rates for apartment and industrial will range between 6% to 7% while vacancy rates for office, retail, and hotel hover at 10%.

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