The coronavirus pandemic deepened its impact on sales and leasing transactions in the second quarter of 2020. Retail, hotel, and office properties were hit the hardest, while residential, industrial, and land assets were being only mildly impacted. These are some of the findings of the latest Commercial Real Estate Market Trends and Outlook, a quarterly survey from the National Association of REALTORS®.
Sales, Leasing Decline Across All Sectors
Nearly 500 REALTORS® provided information about their sales volume, with respondents reporting a 5% year-over-year average decline in sales transactions in the second quarter, mostly transactions of less than $2.5 million. Among transactions valued at $2.5 million or more, sales plunged by 68% year over year, according to a report from Real Capital Analytics.
REALTORS® reported the largest declines in sales of office, retail, and hotels, with sales down by 6% to 7% year over year. Sales of apartment properties and industrial properties dropped 4% year over year, while land sales declined 3%.
Among sales of properties valued at less than $2.5 million, commercial prices declined 3% year over year in Q2 2020. Among transactions of at least $2.5 million, commercial prices were still up nearly 4%, but this increase is lower than in the pre-coronavirus period (6% year over year in January 2020).
Meanwhile, commercial properties held by REITs declined in value 9% year over year, according to the Green Street Commercial Property Price Index.
The Impact of Stay-at-Home Orders
In the small commercial market, according to the NAR research, prices were down across all commercial property types, with the largest decline in hotel (–7%), retail (–6%), and office (–5%). Apartment prices fell by 2% year over year. Industrial commercial real estate prices fell the least, by about 1% year over year.
With sheltering-in-place guidelines shuttering offices and businesses in April and May—and with social distancing guidelines reducing foot traffic in stores, restaurants, bars, and hotels — the vacancy rate across all commercial sectors averaged 25%, up from 7% in the first quarter of the year. With travel at a standstill, hotel vacancies spiked to 73%, up from 10% in Q1, and retail vacancies rose to 20%, up from 9% in Q1. REALTORS® reported smaller increases in industrial and multifamily vacancies.
Collection of Rent Due Varies
NAR also recently surveyed members engaged primarily in leasing and property management. The Leasing Conditions Report revealed that across single-family rentals, apartment buildings, offices, and industrial buildings, at least 90% of rent due in the second quarter was collected. However, only 70% of rent due was collected from tenants at strip malls and freestanding stores, and the fraction of rent collected fell to just half among mall tenants.
The federal CARES Act's $600 weekly pandemic unemployment assistance (PUA), which ended July 31, enabled tenants to keep up rent payments. States had until Sept. 10 to apply for funding under the Lost Wages Assistance Program, which promises federal relief through a partnership between the Federal Emergency Management Association and the Department of Labor. However, the benefit will be less generous, increasing the risk that a higher fraction of rent due in the coming months won’t be collected.
Sixty-four percent of respondents reported landlords offered rent payment options to residential tenants. The most common form of assistance was allowing the tenant to pay the missed rent over several months. Rent payment options offered included:
- Rent abatement or rent reduction
- Frequent, smaller rent payments
- “Other payment options” such as “no late fees or charges,” “use of the security deposit,” and “not increasing the rent when the lease is renewed.”
Sixty-nine percent of respondents said landlords of nonresidential buildings offered rent payment options. Assistance mostly took the form of allowing the tenant to pay the missed rent over several months and rent abatement or reduction. Respondents cited other options, including:
- Extending the lease term for deferred rent
- Extended term on rent abatement
- Using deposit for rent
Investors Seek Higher Returns
Amid lingering uncertainty over the direction of the economic recovery—caused by the resurgence of coronavirus cases, extension of working from home, and effects of increased online shopping—investors are asking for higher returns on long-term demand for commercial real estate. One measure of the increased risk aversion is the difference between operation income (cap rates) and the risk-free 10-year Treasury bond. A larger spread means investors are seeking higher returns to compensate for the increased riskiness of investing in the asset. The risk spread (cap rate less 10-year T bond rate) increased to about 6% in the second quarter of 2020 from just 4% in the first quarter of 2019 in both the large commercial real estate market (transactions of $2.5 million and more) and the small commercial market (less than $2.5 million).
Outlook: Next Three Months
REALTORS® anticipated a continuing tough environment in at least the third quarter. They expected sales transactions to decline across all property types and vacancy rates to remain elevated. Multifamily remains the strongest leg of the business, as turbulent times generally boost the demand for apartments and e-commerce continues to make deeper inroads into retail.