In Marcus and Millichap’s recent Coronavirus Special Report, they analyzed the performance of the major commercial real estate asset classes during the pandemic in order to predict future, post-pandemic investment trends.
I recommend checking out the full report here, because there are many graphs with up-to-date cap rates, asking rent, and vacancy trends for industrial, multifamily, office, and retail commercial real estate.
Here are my top eight takeaways from the report:
1. Improved economic outlook
The US GDP is set to grow between 5% (low-end forecast) and ~9% (high-end forecast) in 2021. Even if the low-end forecast comes to fruition, it will be the greatest single-year GDP increase since at least 2001. This is supported in part by savings deposits and money market funds increasing by an estimated $4.3 trillion since February 2020. This built-up demand will result in increased retail spending, helping the economy grow.
2. Cap rates expected to continue to compress
With the exception of senior housing and office where cap rates are expected to remain the same, cap rates are expected to continue to decrease across all other commercial real estate asset classes. The asset classes with the greatest anticipated decreases in cap rates are self-storage and hospitality.
3. Commercial real estate yields still greater than other alternative low-risk investment vehicles
The spread between the average commercial real estate cap rate and the 10-year Treasury rate is 460 bps (compared to 590 bps in 2011 and 390 bps in 2016).
4. Strong demand for industrial space
Temporary store closures resulted in more people engaging in e-commerce business. As a result, there were a near-record number of deliveries over a 12-month period ending in March, while national industrial vacancy only rose 10 bps and the average asking rent grew by 4.6%.
5. Target secondary and tertiary markets for multifamily
Across primary markets in the last four quarters, vacancy increased by 80 bps and average effective rent declined by 3.4%. However, in secondary and tertiary markets, vacancy decreased by 10 bps and average effective rent grew 2.2% over the same span.
6. Single-tenant retail space preferred over multi-tenant retail space
Demand remains strong for single-tenant office space that at least maintained performance during the pandemic, like discount stores, drugstores, and quick-service drive-thru restaurants. However, some multi-tenant spaces, like grocery-anchored shopping centers in growing submarkets, are in demand.
7. Continued uncertainty in office space, but suburban preferred over urban office space
Due to the uncertainty of people returning to in-person working, cap rates for office have remained largely unchanged. However, medical offices are in demand, which is reflected by minor compression of cap rates. Additionally, suburban office space performed better than urban office space. During a 12-month period ending in March 2021, vacancy rates for suburban offices rose approximately two-thirds as much as compared to urban offices, while asking rents fell by 6.1% for urban office space compared to 0.2% for suburban office space.
8. Private buyers responsible for the majority of purchases during the pandemic
Private buyers accounted for 55% of the total dollars invested during the 12-month period ending in March of 2021, which is 300 bps higher than the pre-pandemic volume. This is typical during economic recessions, but the trend is expected to continue for the near future, especially for purchases in the $1 million to $10 million price range.
Download Marcus and Millichap’s full report here.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.