February 2020 Commercial Real Estate Market Trends and Outlook

This latest Commercial Real Estate Trends & Outlook Report discusses trends in the small commercial market (transactions that are typically less than $2.5 million) based on a survey of commercial REALTORS® about their 2019 Q4 transactions and the latest publicly available data.

Respondents reported commercial dollar sales volume rose 4% in 2019 Q4 from one year ago, new leasing dollar volume rose 3%, and commercial development (in square feet) rose 5%.

Line graph: Year-Over-Year Percent Change in Quarterly Commercial Sales Volume, 2012 to Q4 2020

Among respondents, the median commercial sales price growth in 2019 Q4 from one year ago was 3%. Apartment, industrial warehouse and flex, and office class A properties had the lowest cap rates, with a median of 6.5%. Among respondents, the median cap rate for retail mall properties was also 6.5%. The retail trade industry appears to be adapting to the challenge coming from robust e-commerce sales. In November 2019, the retail trade industry gained 15,300 net new jobs from one year ago, in contrast to the job losses in past months.

Line graph: Year-Over-Year Percent Change is REALTORS® Commercial Real Estate Market Prices, 2009 to Q4 2019

Respondents reported that vacancy rates were still trending downwards. Among respondents, the average commercial vacancy rate across commercial types (multi-family, industrial, retail, and hotel) was 7.3% in 2019 Q4. The lowest rental vacancy rates were in multi-family, at 4%, followed by industrial, at 5%. The highest vacancy rates were in office, at 10%, followed by retail, at 9%.

Line graph: REALTORS Commercial Vacancy Rates by Property Type, 2010 to Q4 2019
Respondents reported that construction activity (in square feet) was up 5% in 2019 Q4 from one year ago. Given the low level of interest rates, majority of respondents reported an improvement in conditions related to obtaining debt (60%) and equity financing (57%). However, only a small fraction reported an improvement pertaining to zoning regulations (33%), hiring and cost of labor (23%), and obtaining and cost of raw materials (21%).

The majority of respondents reported observing an increase in construction activity outside the central business district (73%), repurposing of retail malls (71%), senior housing (68%), transit- oriented development (67%), co-working spaces (62%), apartments with smart home technologies (58%), and Opportunity Zone Fund investments (53%).

Bar graph: Year-Over-Year Change in Commercial Construction Volume Among NAR Commercial Members and Affiliates, 2009 to Q4 2019

GDP growth is likely to pick up to 2.4% in 2020 given the de-escalation of trade tensions between the United States and China. With a pickup in growth, we expect commercial sales transactions to increase 3% in 2020 and commercial prices to increases to 2%. Slightly more than half (53%) of respondents expect more commercial business transactions in the next 12 months. Vacancy rates for apartment and industrial will range between 6% to 7% while vacancy rates for office, retail, and hotel hover at 10%.

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