COMMERCIAL REAL ESTATE CRISIS?

It was a big story in The Wall Street Journal last week. Happy days are here again was the drift of the lengthy article. It began by noting that sales of commercial real estate have bounced back to pre-2020 levels, notching $144.7 billion in this year’s second quarter, according to data firm Real Capital Analytics.  
However, the market is shaped distinctly differently than before the economic crisis.
As we had long forecast, investors are snubbing New York, San Francisco, and other former hotspots in favor of southern U.S. cities. (See “More Manhattan Office Space Goes Vacant,” Trends Journal, 8 June 2021.)
And as for convention hotels and office buildings?  They are being forsaken in favor of warehouses, apartment buildings with lots of amenities, office parks catering to life-science and pharmaceutical firms, and other properties that paid strong returns during the crisis, the WSJ reported.
Shopping malls also lost favor as more shoppers in 2020 established the habit of buying online. (See “Pall on Malls,” Trends Journal, 9 September 2020.)
Thanks to the U.S. Federal Reserve’s policy of rock-bottom interest rates, investors have been able to pay top dollar for properties, distressed or not, that have come on the market.
“Calamity was simply not in the cards for this economic downturn,” thanks to the Fed, Real Capital said in a report quoted by the WSJ.
Apartment buildings have fetched the most interest, booking more than $92 billion in sales this year through July, especially garden apartments outside major city centers, the WSJ said.
Demand for apartments, as well as their rental prices, have been buoyed by a housing market where high prices and stringent lending requirements have locked out many potential buyers, forcing them to keep renting.
“Buyers [of apartment buildings] are saying, ‘I like the strength of tenants, I like the yield here’,” James Costello, vice president of Real Capital, told the WSJ.
Commercial property sales were strongest in areas that gained population during 2020 as people left cities, especially in the north.
Atlanta, Austin, Dallas, Nashville, Phoenix, San Antonio, and Tampa all showed record first-half sales of commercial real estate this year.
All are southern cities.
In contrast, Manhattan, which recorded the second-highest number of commercial property sales in the first half of 2019, sank to 11th place this year; San Francisco slid from the 10th spot to 15th.
Sales of office buildings were clouded by uncertainties about the degree to which working from home was permanent, Real Capital noted.
TREND FORECAST: Remote work as the new normal has spread skilled workers farther from the traditional business hotbeds, particularly on the coasts, and will create new centers of tech, financial, and innovative gravity around the country, reducing the coasts’ cultural influence and giving more to what have been second-tier metro areas in the heartland.
As for commercial real estate, with COVID War 2.0 heating up, where are prices heading? Check out “WILL DELTA VARIANT KILL COMMERCIAL REAL ESTATE?” in this issue of the Trends Journal.