The Simple Reason CRE Is Outperforming Against All Odds

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As the US continues to recover from the COVID-19 pandemic, CRE is outperforming, seemingly against all odds. After all, the US economy has yet to fully recover from the global health crisis.

“We’re still in the middle of a global pandemic,” says John Chang, Senior Vice President and Director, Research Services at Marcus & Millichap. “We shut down a big portion of our economy for several months last year. We have a massive labor shortage, and our supply chain logistics are running into all sorts of problems.”

But despite that, CRE appears to be thriving.

“Apartments are doing great. Vacancy rates hit an all-time low, and rents are climbing. Industrial is doing great. Rents are growing, vacancies are falling despite record construction levels,” Chang says. “Self-storage is also doing great with record low vacancy. Retail, particularly anchored neighborhood centers and single-tenant properties, has held up remarkably well. And office is a bit soft…but the sector definitely hasn’t hit crisis mode.”

And while hotels “have had a tough run,” Chang says the average daily rate for some segments is above pre-COVID levels and occupancy rates are also pretty close to where they were pre-COVID. Meanwhile, senior housing’s “bumpy road” will likely lead to consolidation that will strengthen the sector overall.

So how to explain the disconnect? Chang points to inflation-adjusted household wealth, which is up 21.4% over pre-COVID levels. Even excluding stock market gains and only counting owner-occupied real estate and money in bank accounts, household wealth is still up by 15.7% over 18 months ago.

“That’s a big part of why commercial real estate is outperforming,” Chang says. “Despite the pandemic, the economy is growing. People have money in their pockets and they are spending it. There’s enormous housing demand, retail sales are 19% above pre-COVID levels, and savings are way up.”

The greatest economic risk factors are inflation, “which has little negative impact on CRE in the short term,” and supply chain problems, which Chang says are actually a positive for most CRE property types.  Supply chain issues cause building material shortages, he says, and that in turn constrains competition from CRE development.

“Aside from an inflation or supply chain induced recession, which seems unlikely at least for now, the outlook for most CRE sectors remains promising,” Chang says. “With a baseline economic growth forecast of 4% next year and a strong employment market despite labor shortages the one year outlook for most CRE is strong.”

The outlook for a year-plus is “a little murky,” but momentum is favorable. Supply and demand trends remain favorable, and Chang says that’s why many of the most active investors are pricing strong growth into their underwriting, particularly for industrial, self-storage and apartment properties.

 

Source: GlobeSt

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