COMMERCIAL REAL ESTATE STATISTICS AND TRENDS 2021
The COVID-19 pandemic shook up almost every real estate asset class but actually pointed out some interesting findings. Property types, including Triple Net (NNN), multifamily, and industrial, proved their market resilience even in the face of a global shutdown. At the same time, hospitality and downtown office spaces had a particularly rough time staying afloat.
But as countries are now administering the COVID vaccine, life may soon be back to normal—or whatever the “new normal” that awaits.
The shift to working remotely has yet to show its effects on commercial real estate. Companies are currently trying to figure out whether employees should continue the remote work style, go back to the full 9-to-5 model or create a combination of the two.
Will this impact how net lease and multifamily offices are run? Will people remain cautious and stay indoors, or are they itching to get out and about again? Will people’s preference for online shopping persist and affect traditional retail shopping centers and grocery stores?
Despite these unanswered questions, 2021 is looking very promising for commercial real estate investors. With this in mind, let’s take a look at some of the statistics and trends we see emerging this year.
That said, commercial real estate also has high barriers to entry. Unlike stocks and bonds, which can be easily purchased with $100 or less, commercial real estate requires a substantially higher up-front capital commitment. Even well-educated, experienced investors often find it challenging to identify, underwrite, finance, and then manage commercial properties on their own. Instead, many turn to investing in a fund, which pools their and other investors’ capital and deploys it through an adept sponsor who oversees the investment on their behalf.
Either approach, direct ownership or passive investment, can prove very worthwhile. In today’s article, we look at why all kinds of investors are increasingly drawn to rental properties.
Commercial Real Estate Trends to Look Out For
The widespread COVID-19 shutdowns and shelter-in-place orders sped up the already declining business of brick-and-mortar retail stores. According to the U.S. Department of Commerce, e-commerce sales generated nearly $200 billion in the third quarter of 2020—a 37.1% increase over the same quarter in 2019. The year-over-year growth from Q2 of 2020 was even greater, with a whopping 44.4% rise.
Online shopping will only continue to grow throughout 2021 and beyond, with companies like Amazon at the forefront and retailers are adapting to this by increasing their own digital presence. We expect that the coming years will only cause storefront retail to become more stagnant, with pressure from online ordering and contactless pickup to close physical locations.
However, essential businesses that offer certain goods and services still maintain promise for investors—this would be your CVS, Walgreens, gas stations, automotive service shops, and more.
Related Link: Essential Business Retail Real Estate Investing
Shopping centers and malls have a checkered history with an unclear future. With the closure of many traditional enclosed malls over the past years, their prospects aren’t overwhelming.
CBL Properties and Pennsylvania Real Estate Investment Trust, two companies with significant shopping mall portfolios, filed for bankruptcy last year. The Simon Property Group has also been shrinking its holdings, sometimes even giving the lenders their properties back.
But, outdoor shopping malls seem to have stronger futures for consumers, especially ones marketed as “lifestyle” centers. The outdoor mall grew in popularity before the pandemic due to its more experiential qualities, typically having amenities like ice-skating rinks and beer gardens that will continue to attract people who want to stay outdoors.
Retail centers with grocery anchor tenants will also continue to bring in business. Supermarkets were one of the top-performing retail sectors in 2020. Shopping centers anchored by big-box retail stores, like Best Buy or JCPenney, will continue to struggle to pull in customers this year as preferences change.
The success or failure of commercial office spaces depends largely on how people adapt to the new work life. Some office workers can work from home successfully, and their employers may want to allow them to continue, while others will have employees return for in-person work.
Companies that choose to implement the work-from-home standard will not need as much office space, reducing its demand principally for Class A offices located in more costly downtown markets.
However, demand for the more affordable Class B office spaces could substantially increase, specifically for those located in the suburbs, since many corporations realize expensive downtown offices are an unnecessary expense with increased remote work.
Companies that do want to return to offices will work with their landlord’s new ways to layout the spaces, possibly emphasizing outdoor areas that operate as an extension of the office.
Desk and sitting areas will also be more flexible depending on the amount of employees planning to work from home in a hybrid work model. Commercial offices will also improve office technology to accommodate work-from-home employees.
Commercial office spaces in Single-Tenant Triple Net-Leased (STNL) buildings have shown strong business resilience in the face of the pandemic. Consumers still need medical and dental services even during a lockdown and prefer in-person visits for these needs.
The zoom approach to medical appointments did not prove effective, as trends have shown that people would rather wait their issues out than see a doctor over a camera to diagnose them.
The triple net (NNN) leases of these offices also protected both companies and investors from major financial damage, especially when the properties’ tenants are essential businesses.
Want to know more about the strategic advantages of Single tenant Net Leased properties? Contact Liberty Real Estate Fund to learn more.
The major leasing season of 2020 for apartments did not bode well during COVID-19; the second quarter of 2020 reached a 22-year high for apartment vacancies. However, leasing began to fix itself in June of 2020 and has since remained fairly stable, with the apartment vacancy rate dropping to 6.7% by Q4 2020.
Due to this healthy vacancy rate—except for slightly high urban downtown areas—we expect the multifamily market to continue stabilizing itself throughout 2021.
Multifamily unit demand is projected to increase, especially in suburban locations with close proximity and access to urban areas. These suburban areas usually offer more space and are even more affordable—prime real estate factor as people start to look for apartments that have outdoor and home-office spaces.
Widespread eviction notices have majorly disrupted the cash flow to many multifamily landlords; tenants were allowed to withhold rent payments from landlords, sometimes indefinitely, by some state and federal relief policies passed during the pandemic.
We predict these eviction moratoriums to be lifted in 2021, allowing landlords to evict nonpaying tenants and offer those buildings to rent-paying tenants. Tenants facing eviction who need to catch up on their debts may also pay larger lump-sum payments to landlords.
A new trend popularized last year by the pandemic “was Ghost kitchens”—facilities that provide the “kitchen” function of a restaurant without offering in-person dining or customer interaction. For example, former Uber CEO Travis Kalanick invested in CloudKitchens, calling the revenue stream of ghost kitchens.
Many restaurant managers subleased space in struggling franchises’ buildings, like Ruby Tuesday’s, to use their kitchens and sell their own products somewhere else—direct-to-consumer deliveries with apps like UberEats and GrubHub).
The ghost kitchen model dispenses food and drinks at a low cost more quickly than opening new full-service restaurants while providing supplemental income to physical restaurants that were struggling with indoor dining restrictions.
Last-mile distribution facilities, or industrial warehouse spaces, thrived after COVID-19 hit as demand for e-commerce grew popular. Even grocery stores are increasingly using these spaces due to more grocers offering online shopping and delivery options.
With convenience becoming key during the pandemic, the ability to provide two-day (if not same-day) shipping made these last-mile distribution centers even more important to competing businesses.
Commercial real estate has typically been cautious about adopting new technology, but we expect landlords to adapt quickly in 2021. COVID-19 began the demand for digital property showings, leasing, and the electronic signing of all documents.
We expect this digital progression to become the new standard with its ever-growing efficiency and ease. However, this requires property managers to adapt to new business models that complement the technologies (if they haven’t already).
Commercial office spaces will also implement new technologies as well to create “smart” building software that can add value, like monitoring air quality.
New commercial real estate technology also aims to help the hospitality industry, considering travelers who are increasingly interested in limited face-to-face interactions with staff. Incorporating technologies—contactless check-ins, keyless entry, and even Amazon Alexa—in rooms can efficiently help the hospitality industry streamline guest requests.
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Related Link: Investing in High Growth Sunbelt States
Where Should Investors Focus in 2021?
As work standards begin to shift with more people having the flexibility to work (at least partially) from home, this will create opportunities in secondary markets like Austin, Nashville, and Denver. These cities have tremendous amenities but offer a lower-cost lifestyle that many people, especially the younger demographic, will want to take advantage of—if given the option to work remotely.
Investors will find that these cities typically have fewer regulations compared to cities like New York and San Francisco and will benefit from more easy-going policies around things like rent control.
However, not everyone will have the freedom to relocate, making multifamily investments in inner-suburban areas very attractive across all metros. Suburban properties located close to urban centers like Boston, Los Angeles, and Manhattan will win favor among investors as people will increasingly want to live farther from work—so long as they commute to the office only once or twice a week.
Which Sections in Commercial Real Estate Should We be Cautious of?
Burj Al Arab
Though demand for travel seems bound to skyrocket, we continue to be cautious about the hospitality industry. Many hotels were averaging single-digit occupancy rates through the worst of the pandemic and have been slow to recover ever since.
Hotels that cater to business travelers will likely fare the worst in 2021 while the uptick in corporate travel remains slow. Hotels with conference venues will also struggle since few large-scale events have been planned this year, given the ongoing COVID concerns.
Hotels that cater to leisure travel will fare better in 2021 and could be an investment worth considering. Travelers will look to capitalize on airlines’ low rates and begin to plan more domestic leisure trips for the second half of 2021.
Class-A Office Space
As noted above, Class-A offices continue to struggle. Many tenants will be downsizing their office spaces and may begin to sublease to other tenants. If fewer people return to the office full-time, many tenants will opt out of their current Class-A leases in favor of the more affordable Class-B buildings.
Class-A office landlords should expect to offer significant rent concessions and tenant improvement allowances in 2021 in order to lure tenants willing to sign long-term leases.
Big-box retailers, such as Sears, Macy’s, and Best Buy, have already taken a major hit before the pandemic. These retail locations will continue to struggle during 2021 and beyond as consumer preferences shift and e-commerce continually grows in popularity.
Big-box retailers usually have huge overhead, making these types of facilities difficult to maintain over the long term since consumer trends have shifted. In fact, we expect to see many big-box retail outlets converted and repurposed into last-mile distribution facilities this year due to the demand for these properties.
What Opportunities Are in The Future for Commercial Real Estate
Many investors took a step back and paused when the pandemic first hit, resulting in a lot of pent-up capital sitting on the sidelines. Many investors initially thought that COVID would usher in widespread defaults and create good deals, but prices have not dropped as much as people expected.
With the various government interventions, most landlords have been able to stay afloat, and cash flows will start to stabilize this year.
That said, some markets and property types will be particularly attractive this year: deals in the Midwest and Southeast will continue to lure investors. Job growth in areas like Raleigh/Durham, Nashville, and Austin will increase demand for all property types.
We expect investors will be drawn to the suburban multifamily market, last-mile industrial and warehouse properties, and net lease medical and dental office buildings in terms of property types. Life science facilities have also benefitted from a massive influx of federal funding for vaccine and related research.
Properties that can be renovated with new sustainable features will also attract business; cities are starting to adopt regulations that require developers to be carbon neutral—or, at a minimum, chart a path toward carbon neutrality. Residents and employees are also looking to their landlords to deliver sustainable features as society becomes more eco-conscious.
We will continue to monitor commercial real estate statistics and trends heading into Q2 2021 and beyond.
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