Roughly one year into the coronavirus outbreak, commercial real estate owners are starting to fully price in the effects of the global pandemic. There are endless ways to analyze the impact of the past year on commercial property valuations, but one useful metric is tracking the prevalence of rent gains across the various property types.
Showing the percent of submarkets across the U.S. that have increased asking rents or average daily rates on a year-over-year basis, reported quarterly, reveals a wide variation by property type.
Because property owners would not hike asking rents if they weren’t feeling confident about the near-term demand and economic growth prospects for their properties, this data represents a confidence index of sorts, highlighting how owners of each property type feel that those sectors will perform over the next few quarters, or in the very near term in the case of hotels which are priced based on immediate expected demand.
Unsurprisingly, industrial landlords have been the most bullish. Roughly 97% of all U.S. industrial submarkets larger than 4 million square feet posted rent gains over the past year, and that number remained consistent during the pandemic. The transformation of supply chains and distribution networks continues to boost industrial demand from e-commerce tenants.
But it’s not just the Amazons of the world that are driving positive momentum for industrial buildings, manufacturers have seen their orders increase over the past year boosted by sales of durable goods. The nation’s single-family sector is also ramping up, and homebuilders continue to show increased demand for materials associated with home construction. The increase in home starts is a result of historically low interest rates along with a shift in preference towards homeownership amid the pandemic.
The apartment market took a hit initially, with the percentage of submarkets reporting year-over-year rent gains plummeting from about 96% as of the end of 2019 to 72% as of midyear 2020. However, that figure has stabilized over the past few quarters, a sign of the sector’s resilience.
Many expected the multifamily market to bear the brunt of the pandemic as shorter lease terms and a significant drop in employment spelled trouble for the industry in March of 2020. But the U.S. government’s quick implementation of the Coronavirus Aid, Relief, and Economic Security, or CARES, Act helped renters replace lost income and meet their financial obligations.
The retail sector has been more resilient than most would expect with 60% of submarkets posting rent gains over the past year. With widespread vaccinations being rolled out throughout the country, many landlords are eagerly anticipating a return to somewhat-normal shopping habits, though the significant number of bankruptcies by national brands certainly casts a pall over the outlook.
Aside from hospitality, the office market appears the least confident in returning demand with just over 50% of submarkets seeing year-over-year rent increases. With rising vacancies and a sharp increase in available sublease space across the country, landlords are feeling the effects of increasing competition for a relatively limited demand pool.
Demand for office space is further uncertain as companies evaluate their space needs in the wake of the pandemic, while the prospect of more-permanent remote-work arrangements looms large over the office sector. It’s clear that these factors are weighing on landlords’ confidence, and it wouldn’t come as much of a surprise if more submarkets start to lower asking rents to compete for a shrinking tenant pool.
But the weakness in the office sector pales in comparison to what we’ve seen in the hospitality industry. As of year-end 2020, only 3% of hospitality submarkets experienced ADR growth over the prior year, a worse showing than during the Great Recession, when this metric bottomed out at 11%.
However, beginning in the second quarter of 2021, the share of hospitality submarkets with ADR growth is likely to bounce back nearly as quickly as it fell. Hotel room prices dropped when the pandemic hit and have been slowly climbing since then. As we move into the second quarter of 2021, we expect year-over-year comparisons will see a rebound from early pandemic-era hotel rates in most hospitality submarkets.
Hotel room rates are essentially daily rents, and therefore ADR in the hospitality industry is less of a confidence index than asking rents for other property types. Instead of being driven by the outlook for the next several quarters, ADR growth is driven by the outlook for the next night.
Some submarkets experienced relatively strong travel demand during the pandemic, which provided hoteliers pricing power. Most of these are in coastal areas or outdoor destinations. As vaccinations become more widely distributed and confidence to travel safely returns, hotel room rates will likely increase at a rapid rate across the country.