Where Opportunity Lies

With the economy and businesses still hobbled by the pan­demic, commercial real estate transactions are struggling to make a comeback. However, the land and industrial properties markets are bucking that trend, according to the National Association of REALTORS® fourth quarter market survey of commercial members.

Looking at the member survey against other available data indicates that the market in which NAR commercial mem­bers typically work (representing transactions below $2.5 million) is faring much better than commercial real estate overall. Among REALTORS® whose primary business area is in sales, sales volume contracted by 2% on average in the fourth quarter, compared with the fourth quarter of 2019. In contrast, for transactions of $2.5 million or more, Real Capital Analytics reports that sales declined 56% year over year in the same period.

Meanwhile, NAR commercial members reported an aver­age 3% increase year over year in the dollar volume of land sales. The survey defined a land transaction as one where the value of the property is at least 51% of the total prop­erty value. Among land transactions, the largest gains were in sales of recreational land (for camping, hunting, fish­ing, and so on), ranches, and residential land. This is likely attributable to consumer desire to buy outside of urban centers in the wake of the COVID-19 pandemic.

Industrial Activity in Major Markets, Office Gains in Smaller Markets

The darling and lifeblood of commercial real estate today is the industrial property market. Demand has been bolstered by the acceleration of e-commerce sales. REALTORS® re­ported that dollar sales volume for industrial properties rose 1% in Q4. According to Real Capital Analytics, the most active markets with respect to industrial property ac­quisitions were Los Angeles, Chicago, Dallas, Atlanta, and the Inland Empire (Southern California).

In the hardest-hit commercial segment, hotel/hospitality sales, REALTORS® reported an average decline of 5%. January 2021 data from the U.S. Census Bureau showed that about half of businesses in food service and accommo­dation reported they were operating at half the capacity of one year ago.

Meanwhile, with about a quarter of the workforce still working from home, office occupancy fell by 98 million square feet in 2020. The largest losses of office occupancy were in primary/gateway cities such as San Francisco and New York, each with a 9 million square foot loss of office occupancy, followed by Boston (7.5 million square feet) and Dallas (5 million square feet).

Secondary and tertiary areas—such as Raleigh-Durham, N.C.; Hampton Roads, Va.; Boise, Idaho; Milwaukee; Fort Myers, Fla.; Northern Virginia; Colorado Springs, Colo.; and Syracuse, N.Y.—are holding up better. One reason these smaller metro areas are continuing to see increased demand is the price differential: In 2020, the average price per square foot in the central business district in the six major markets (New York, Chicago, Boston, Washington, D.C., San Francisco, and Los Angeles) was $769. By contrast, the cost per square foot in the non-major markets was less than half that, $280, according to Real Capital Analytics.

Commercial Outlook in 2021

REALTORS® expect the demand for industrial space and land to remain strong compared to other assets. Working from home, the desire for a place outside urban areas, and the growth of e-commerce will continue to be the primary drivers of growth.

Apartment buildings are expected to show modest growth, with investors still worried about the ability of renters to pay rent. Nearly 20% of renters are not caught up on rent, according to the Census Bureau’s December Household Pulse Survey.

Meanwhile, hotels and the lodging sector will continue to operate at below normal capacity until the effective­ness of the vaccine starts to become evident, when we can expect to see more traveling and in-person business and personal gatherings.

2021 is still going to be a challenging year for commercial real estate, but the trajectory is up.

See the full Q4 survey in the January 2021 Commercial Real Estate Market Trends and Outlook Report.