First quarter transaction and market data show commercial real estate is digging out of its pandemic slump—but it hasn’t bounced back to pre-pandemic levels.

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

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.

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The Changing Demand

Predicted effects of COVID-19 on demand for office space are starting to materialize. A sizable majority of NAR commercial members who responded to the Q1 survey—70%—reported that companies are reducing their square footage needs due to more employees working from home. In addition, more than half of respondents—57%—reported that they are seeing shorter-term leases compared with before the pandemic.

Despite these troubling indicators, there are pockets of opportunities, particularly in secondary and tertiary markets. 

Respondents to the Q1 survey anticipate a modest increase in sales of land (5%), industrial warehouses (3%), and class B/C apartments (1%) in the next 12 months. Respondents anticipate a decline in sales transactions for retail, office, and hotel and hospitality properties.


Smaller Cities Buck Office Trends

According to the Bureau of Labor Statistics, 21% of the workforce was still working from home as of March 2021, up from 6% before the pandemic. Not surprisingly, the national office vacancy rate continued to tick up in the first quarter of 2021, to 16.4%, from 13% one year ago. Vacancy rates have increased as occupiers shed 138.4 million square feet of office space. That’s the equivalent of 2,403 football fields, or 48 football fields per state.

The largest increases have occurred in big cities where finance and tech companies are headquartered. San Francisco’s overall vacancy rate—direct and available via sublet—increased by 12.7 percentage points compared with one year ago, jumping from 6% to 18.7%, as 9.7 million square feet became unoccupied, according to Cushman and Wakefield. In Seattle, the vacancy rate rose from 8% to 17.2%, as 4.3 million square feet of office space became unoccupied. The New York–Midtown South market shed the most office space, 10.7 million square feet, leading to an vacancy rate of 17%, up from 8.2%. Other metro areas with a relatively large tech workforce, such as Austin, Texas; Nashville, Tenn.; Rochester, N.Y.; and Salt Lake City, also saw a surge in overall vacancy rates.

In most secondary or tertiary cities, vacancy rates have increased only modestly. One factor could be the Paycheck Protection Program, which has helped small businesses stay afloat and continue to pay rent throughout the pandemic. The U.S. Census Bureau’s Business Pulse Survey, launched in April 2020, shows less than 2% of small businesses have closed permanently. Lower asking rents may also be a factor. For example, Boise, Idaho, saw just a 1.7% increase in office vacancy rates compared with a year ago. The asking office rent in Boise is just $21.50 per square foot, compared with $40 in San Francisco.

In some cities, a large part of the available office space is for sublet. Direct tenants are still leasing the space, but with workers working at home, they’re subletting unused space. Available office space from flexible operators like WeWork is also part of this subleased vacancy. Tech workers and startup companies have been the largest occupiers of flexible office space.

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