The commercial real estate market is recovering, according to the National Association of REALTORS®’ quarterly market survey of commercial members and other industry data, but it remains weak compared to conditions before the COVID-19 pandemic.
Acquisitions for large commercial real estate—properties or portfolios of at least $2.5 million—fell 28% year over year in the first quarter of 2021, with transactions declining across all property types, except for hotel acquisitions. Investors could be acquiring hotels to convert into other uses such as multifamily housing. (NAR recently released a report detailing five case studies of hotels and motels repurposed as multifamily housing. Find it at nar.realtor.
By contrast, in smaller markets where transactions are less than $2.5 million, NAR commercial members who participated in the survey reported that their sales transactions volume in the first quarter of 2021 contracted by just 1% compared to the level one year ago. Respondents reported an increase in acquisitions for industrial properties and all types of land, with strong growth in sales of residential and industrial land.
Prices Begin to Recover
Commercial real estate prices continue to firm up, but the value of commercial real estate is still broadly down by nearly 6% compared to one year ago, based on the Green Street Commercial Price Index, an appraisal-based index of the properties held by REITs. The decline has tapered off from the 10% decline in the second quarter of 2020. Among closed transactions valued at $2.5 million or more, sales prices rose 6.7% from one year ago, according to Real Capital Analytics. Among closed transactions of NAR commercial members (typically below $2.5 million), sales prices rose by 2% on average year over year. NAR members reported particularly strong price gains for land (+6%), industrial warehouses (+5%), class B/C apartments (+5%). Residential land prices were up 9%.
Cap Rates on the Decline
While prices are showing some firming, cap rates have been on the decline. Risk spreads (cap rate less 10-year T-note) for the office, retail, industrial, and hotel sectors have also trended downward. First-quarter cap rates were at about the same level as those of one year ago.
However, the market is still thin, so first-quarter rates likely reflect transactions of prime properties or properties expected to yield good cash flows when redeveloped or put to uses other than the existing use.