Economists' Outlook

Housing stats and analysis from NAR's research experts.

Small Shoots of a Recovery in Commercial Real Estate Transactions in 2020 Q3

Sales/acquisitions of commercial real estate continued to contract in the third quarter, but the decline was smaller in the third quarter compared to the second quarter, according to NAR’s latest survey of its commercial members1 and market data, as reported in the October 2020 Commercial Market Trends and Outlook Report.  In its third-quarter survey of its members who are primarily engaged in commercial transactions, respondents reported that, on average, their sales transactions declined by 3% year-over-year, a smaller rate compared to the 5% decline in the second quarter.

This trend is also occurring among transactions that are at least $2.5 million, according to Real Capital Analytics which tracks the large commercial real estate market. In the third quarter, the dollar volume of transactions contracted by 57% from one year ago compared to a decline of 68% in the second quarter. Commercial real estate transactions in the large CRE market increased to $68.5 billion from $50 billion in the second quarter. So, there’s a mild recovery underway, but transactions are still a long way down from the quarterly average of about $120 billion from 2012 to 2019.

Line graph/bar chart: Sales of Commercial Real Estate Properties, 2009 to Q3 2020

Milder Decline in Residential, Industrial, and Land Sales

The pandemic is hitting commercial property types in various degrees. Amid social distancing and with about half of office-based workers still working from home, REALTORS® reported the heaviest declines in sales transactions in 2020 Q3 for retail malls (-7% y/y), retail strip centers (-5% y), retail free-standing (-4% y/y), and office class A properties (-5% y/y).

However, transactions for industrial flex properties and apartments declined less, by 1%. The demand for industrial properties has been buoyed up the acceleration of electronic shopping and mail-order sales that as of August 2020 accounted for 15% of retail sales, up from 13% at the beginning of the year, or about $100 billion more on an annual basis.

Bar chart: Commercial Sales Volume of Apartment Land and Industrial Properties Below 2.5 Million in Q3 2020

Office Occupancy Declines While Industrial Occupancy Increases

Data from Cushman and Wakefield shows that the office occupancy has now fallen by 64 million square feet in the second and third quarters, with the largest loss of occupancy in New York (-7.7 MS), San Francisco (-6.4 MSF), Los Angeles (-4.2 MSF), Dallas (-3.9 MSF), ad Boston (-3.1 MSF).   However, Raleigh, Minneapolis, and Boise saw an increase in office occupancy.

Bar chart: Net Absorption of Office Space in Q2 to Q3 2020

In contrast, occupancy in industrial spaces increased by 112 million square feet, with the largest gains in net absorption in 2020 Q2-Q3 in Pennsylvania, Southern California, Dallas, Chicago, and Houston.

Bar chart: Net Absorption of Industrial Space

Strong Demand for Recreational Land

With the pandemic constraining activities such as dining out or going to theater and movies, and other leisure activities that happen in an urban setting, there has been an increase in demand for land for recreational use. People may also be looking to purchase homes outside of the city, leading to an increase in sales of residential land. On average, respondents reported that sales of land for residential use rose 6% year-over-year and sales of land for recreational use rose 5%.   A land transaction is any transaction where the value of the land, including improvements that are agricultural in nature, accounts for at least 51% of the total sale of the transaction.

Bar chart: Land Sales of REALTORS in Q3 2020 by Property Type

Pandemic Effects: Smaller Offices, Shorter-term Leases, and Repurposing of Vacant Malls

The 2020 Q3 survey asked REALTORS® about changes they are seeing in their markets as property owners, property managers, and developers adapt to the current loss of occupancy due to working from home and reduced in-person foot traffic:

  • 76% of respondents reported more companies are investing in systems and protocols in increased hygiene, sanitation, and appropriate social distancing in offices
  • 62% reported they are seeing more companies moving into or leasing offices with smaller square footage with companies still working from home
  • 59% of respondents reported they are seeing more short-term leases of two years or less
  • 52% of respondents reported they are seeing more vacant malls being repurposed
  • 48% reported seeing more occupiers with headquarters in CBD and satellite offices in the suburbs
Table: Changes Seen in Commercial Areas Relative to January 2020 (Pre-Pandemic)

1 The survey had 650 respondents, with an average sales transaction of $575,200 (small commercial real estate market).  Number of responses will vary by question due to non-response or questions that were not required to be answered.

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