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Commercial Real Estate Market Overview
The commercial real estate market is recovering but remains weak compared to conditions before the COVID-19 pandemic, according to NAR commercial members who responded to the 2021 Q1 Commercial Real Estate Quarterly Market Survey and industry data. A majority of respondents to the 2021 Q1 commercial survey―70% ― reported that companies are leasing or moving into office with small square footage due to working from home.
Acquisitions for large commercial real estate―properties or portfolios of at least $2.5 million ― fell 28% year-over-year in the first quarter of 2021, with transactions declining across all property types, except for hotel acquisitions. Investors could be acquiring hotels to convert into other uses such as multifamily housing.
Commercial real estate prices continue to firm up, but the value of commercial real estate is still broadly down by 6% compared to one year ago.
Commercial Sales Transactions Down 28% from One Year Ago
As businesses continue to operate below normal capacity and with people and businesses still holding back on travel and recreation with COVID-19 vaccinations still underway, commercial sales transactions continued to decline in the first quarter of 2021.
Commercial transactions of $2.5 million and above decreased 28% from one year ago, according to Real Capital Analytics. Transactions were down across all property types except for hotel properties where acquisitions rose 13%. Investors could be acquiring some hotels to be converted into other uses, such as multifamily housing. Apartment buildings accounted for a third of the closed transactions.
Commercial Prices are Recovering But Still Down 6%
Commercial real estate prices continue to firm up, but the value of commercial real estate is still broadly down by 6% compared to one year ago, based on the Green Street Commercial Price Index, an appraisal-based index of the properties held by REITs. The decline has tapered off from the 10% decline in the second quarter of 2020.
Among closed transactions valued at $2.5 million or over, sales prices rose 6.7% from one year ago, according to Real Capital Analytics.
Leasing Activity for New Leases and Renewals Continues to Fall in 2021 Q1
For the fifth consecutive quarter, the dollar volume of new leases and renewals among properties leased or managed by NAR commercial members who responded to the survey fell by 2% on average in 2021 Q2.
Office Occupancy Continues to Fall While Industrial Occupancy Rises in 2021 Q1
For the fourth consecutive quarter, office absorption was negative (-41.1 MSF), bringing the total negative net absorption since 2020 Q2 to 138.4 million square feet (MSF), according to Cushman and Wakefield market data. Office vacancy continued to rise to 16.4% from 13% in 2020 Q1.
On the other hand, occupancy in industrial spaces rose 82.7 million square feet in 2021 Q1 and totaled 309.7 million square feet during in the past four quarters. The increase in industrial absorption offsets the negative net absorption in the office sector (-138.4 million square feet (MSF).
More Residential and Industrial Development
Commercial members of NAR who are engaged in construction/development reported that on average, their construction activity (in square feet) was up 1% from one year ago. On average, respondents reported a 12% year-over-year increase in construction activity (in square footage) for industrial warehouses. Construction activity was also up by 6% for Class A apartments ad 2% higher for Class B/C. However, construction activity for retail malls, office, hotel, retail, and senior housing declined.
Commercial Real Estate Market Recovery in 2021 and 2022
The commercial real estate market’s recovery will remain uneven in 2021. Commercial members of NAR who responded to the survey anticipate a modest increase in sales of land (5%), industrial warehouses (3%), and Class B/C apartments (1%), but anticipate a decline in sales transactions of retail, office, and hotel/hospitality properties in the next 12 months.
However, commercial real estate transactions should experience a stronger recovery across all sectors in 2022 as more businesses operate at normal capacity, a larger fraction of the workforce returns to the office, and as business and leisure travel picks up strongly in 2022 with the broad swath of the population fully vaccinated, and assuming there is no resurgence of deadlier COVID-19 variants.
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