Commercial real estate (CRE) has had a very volatile year. At the start of 2020, commercial real estate was well poised for continued growth and expansion with high optimism among all sectors, but the onset of the global pandemic shook the CRE market, turning many sectors upside down and creating uncertainty and concern for short- and long-term performance for many sectors. As 2020 comes to a close, let’s see how commercial real estate has fared and things to look for as we move into a new year.
The impact of coronavirus on commercial real estate
Initial shutdowns relating to the global pandemic caused major disruptions to the commercial real estate market in Q2 2020. Supply-chain interruptions, government mandates, and social- distancing protocols created a shift in demand across all sectors. As the economy started to reopen in early to mid summer, several sectors saw improvements returning to more normalized activity while others continue to struggle.
To date, commercial real estate activity is down 48% year over year globally. Retail, hotel and lodging, and office are the three commercial real estate sectors that were hit the hardest, with experts estimating a 12-month or more recovery period. Industrial and logistics is by far the leader among CRE currently with multifamily properties, particularly those in suburban areas trailing behind.
Despite certain sectors having a tough time, there are relatively few distressed asset sales in the commercial space, with most property owners expecting prices that match or beat values in Q1 of 2020. Flattened rental rates and higher vacancies are expected across the board, with cap rates remaining flat in all sectors but hotel and lodging (which was excluded from the survey) and retail.
Industrial and logistics
Industrial real estate was already the leader among commercial real estate in demand, net absorption rates, occupancy, and returns. While there were minor short-term interruptions from the initial onset of the pandemic, it was short lived. With more consumers shopping online, demand has increased for retail distribution and storage space as well as logistics warehouses, with these three industries making up 71% of all leasing activity. E-commerce leasing activity accounts for 71.3 million rentable square feet, the largest of any industrial and logistic subsector in 2020 so far. Triple-net-lease asking rates have increased 6.4% year over year, while vacancy rates are down to 4.7%. While supply is steadily outpacing leasing rates, availability rate is still well within historical average.