3 minute read
Mid-Year Market Outlook
Dianne P. Crocker, Principal Analyst, LightBox
With the summer season in full swing, the market’s recovery from the pandemic marches on. When the COVID-19 health crisis hit 15 months ago, the impacts were widely felt across the commercial real estate sector—from listings activity to due diligence to deal closings, and it is in those metrics where the market now shows the strongest signs of rebound. Commercial property listings are up across the board. The LightBox ScoreKeeper model shows environmental due diligence activity dramatically improved over 2020 through mid-year. Investor confidence is at its highest levels in more than a year, bolstered by the rapid vaccine rollout, continued economic stimulus, and the easing of pandemic-related restrictions on business operations and travel.
Virtually every EBA member I reached out to in writing this mid-year update reports that staff is working full throttle as capital moves back into play. In fact, economic momentum has gained sufficient strength that forecasts for the second half of 2021 by firms like Moody’s, JLL, Cushman Wakefield and others are being revised upward, positioning the market for a busy second half.
Now, of course, attention shifts from: When will the market recover from the shock of the COVID-19 health crisis? to: How long can the market sustain this robust level of activity?
Industrial Still Leads the Pack
In terms of property transactions, activity has rebounded sharply from one year ago across all asset classes, but some are still not back to pre-pandemic norms. Real Capital Analytics reports that deal activity this year through May totaled $169.9B, still 15% below the $199.4B prepandemic average in the years 2015-2019.
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continued: Mid-Year Market Outlook: Light at the End of the Tunnel, Optimism High in 2H2021
One market condition that hasn’t changed since my previous update is that industrial still leads the race relative to other major property types. Demand is highest for warehouses, distribution facilities, and other industrial properties, particularly those located in last-mile hubs. The health crisis only accelerated the reliance on e-commerce that was boosting industrial prior to COVID, and as a result, investors are aggressively looking to build out their industrial holdings for strong returns. Like industrial, multifamily is drawing strong investor interest, particularly given the strong forecast for rents, prices and vacancy rates, especially in strong population-growth secondary metros.
Retail, office, and segments of the hotel market, however, are likely to continue to struggle. From a lending perspective, the Mortgage Bankers Association reported that lending in retail was down 45% in 1Q21 vs. the corresponding quarter of 2020. Office lending was down 34%, and hotels fell by a more significant 82%. In contrast, multifamily property lending was down by only 5%, and debt for industrial properties increased 66%.
The outlook for office is still hazy as we wait to see what the protracted period of work-fromhome means for office rents and occupancy rates. With many tenants transitioning staff back into office settings by fall or year-end 2021, more clarity on demand for office properties will emerge over the next few quarters. It seems clear that outdated office assets that do not offer tenant amenities, energy-efficient systems and flexible workspaces will face pressure to upgrade in order to compete post-pandemic with more modern properties.
Distressed Asset Forecasts Downgraded
Investors who have been lying in wait to pounce on distressed asset opportunities may be disappointed. Given how sharply the health crisis hit, particularly hotels and retail properties, investors expected to see distressed asset and loan sales surface in abundance this year. Although distressed deals are happening, the price decline expectations have moderated. According to Moody’s chief analyst Victor Calanog, “I expect the pandemic-driven declines in property pricing to be much less severe, except for office and retail, and hotel may well be past the worst of the declines. The reason for this is that commercial real estate market participants, in general, were well-behaved prior to the onset of COVID, and that translates into less pressure to sell at bargain basement pricing post-pandemic.” It is important to note however that a significant volume of property assets remain that still need to be dealt with, where troubled borrowers are struggling to make payments. Some of these will recover, and others will need to be dealt with in the form of foreclosures, distressed loan sales or other avenues of resolution.
