Archives for February 2021

Multifamily Fundamentals Expected to Stabilize By Q2

February 9, 2021 by CARNM

Net absorption in the fourth quarter was far better than expected.

Multifamily fundamentals are expected to stabilize as soon as the second quarter of this year, according to new research from CBRE. In a new report, the firm says it expects “steady market recovery” through the second half of 2021.
Net absorption for multifamily during the fourth quarter of 2020 totaled 55,600 units, a number the firm described as “far better than expected” since leasing is normally anemic during these months of any year, as well as during recessions. Absorption for the past four quarters clocked in at 190,600 units, and suburban submarkets, smaller markets, and the Midwestern, Mountain West and Southeast regions fared better than average—as did Class B and C assets.
The overall vacancy rate lifted 10 basis points to 4.5% in Q4, a 50 basis point increase year-over-year, and average rents dropped 4.2% from the same period in 2019. A slew of new deliveries also significantly outpaced demand during the fourth quarter, as average rents declined 1.6% to $1,666 per month.
Overall, though, average rents for US apartments are nearing all-time highs last seen in the early part of last year, as GlobeSt.com previously reported. Effective asking rents across the largest 150 metros in the country in January 2021 were only 0.3% lower year-over-year, with markets in Riverside, San Bernardino, and Sacramento posting the largest increases. Other hot markets include Memphis, Greensboro/Winston-Salem, Virginia Beach, Phoenix, and Detroit.
Source: “Multifamily Fundamentals Expected to Stabilize By Q2“

Why US Office Demand Is Likely to Slump 15% Post-Pandemic

February 9, 2021 by CARNM

Work from home and stabilizing densification are among the drivers.

Green Street has encapsulated two major trends driving the office sector right now to provide a tangible (and grim) number for office demand post-COVID: -15%.
COVID-19 has wrought a slew of changes to the sector, with social distancing stabilizing densification, or less square feet per worker, a trend that’s dominated office for the last decade. This development—taken together with a continued increase in work-from-home policies among companies— suggests that aggregate office demand will take a 15% hit in the future, according to Green Street’s analysis.
Citing surveys that show employee preference to spend at least one day a week from home, Green Street states that a “decent amount” of employees—or 10%—will likely continue to work from home on a more permanent basis. This is a threefold increase over pre-pandemic levels. Post-pandemic, Green Street predicts workers will spend around 20% less time in the office than they did pre-COVID, and that means companies will need less space.
But the calculus is not that simple, according to Green Street: companies will have to grapple with the “practical realities” of questions like how many workers will share desks, how much meeting space is required, and how to stagger employee schedules.
“These challenges will require a majority of pre-COVID office space to be kept, but suggests ~15% of office demand may be reduced given an increase in WFH,” the report states. While it’s possible that in-office density could go down post-COVID, ostensibly leading to increased demand, the reality is that many office users will continue to offer WFH for the foreseeable future. This, Green Street posits, will reduce overall demand if there is more hot desking and shared arrangements (and the firm predicts 10-15% of desks will head in this direction). Greet Street predicts the average daily occupancy of an office may fall as much as 20%.
“In sum, less office space would be needed for the same amount of employees who will be showing up less often to the office,” the report states. “The net result is an increase in ‘effective density’, which should be the yardstick for measuring density and its impact on office demand. An increase in effective density means less space per total employees and thus, lower office demand.”
Source: “Why US Office Demand Is Likely to Slump 15% Post-Pandemic“

Industrial Continues Its Boom Times Ignoring a Few Looming Clouds

February 8, 2021 by CARNM

Overbuilding and tenants that are struggling with the pandemic are two possible challenges that the sector might face.

Blackstone REIT and LBA Logistics recently partnered to recapitalize industrial properties. BREIT acquired a 60% stake in two industrial portfolios owned by LBA in a deal valued at $1.6 billion. The two portfolios totaled 71 properties and 9.5 million square feet.
While the properties are located in predominantly last mile locations in West Coast markets, specifically in Seattle and California, which are two top performing industrial markets in the country, the same strong fundamentals can be said for other regions of the country as well.
During the pandemic, several major institutions have increased exposure to the industrial sector, particularly in high-quality logistics and e-commerce markets. Brian Kim, head of acquisitions and capital markets for BREIT, said that logistics properties are the REIT’s top investment priorities globally.
Duke Realty is another example of one developer who has continued to expand its pipeline this year as well. The developer has active projects in Chicago, San Francisco, Seattle, Atlanta, New Jersey and South Florida, and 3.1 million square feet under construction in Southern California alone. That includes a 1.2 million square foot industrial facility that broke ground this month.
There is good reason for the industry’s fervent bullishness on the industrial sector. Despite the pandemic and market downturn, industrial absorption has performed well in 2020. A recent report from Colliers International shows that industrial absorption outpaced new deliveries last year with US industrial inventory increasing by 2.4% in 2020, while national absorption rose 3.3%.
Strong industrial fundamentals have led to a slew of impressive industrial deals. This trend culminated at the end of last year, but has clearly continued into 2021. Some of the most notable recent transactions include KKR’s acquisition of an $800 million 100-property industrial portfolio; Crow Holdings partnership with Allianz Real Estate to acquire a 49% stake in a 19-asset, 6.1 million-square-foot US industrial portfolio developed by Crow Holdings; and Rexford Industrial Realty’s acquisition of an 18-asset industrial property portfolio for $154.6 million.
That pace is expected to continue. According to a recent GlobeSt.com article, global investors are optimistic the market will rebound in 2021, according to new research from Colliers International Group. Colliers’ new Global Capital Markets 2021 Investor Outlook anticipates investment activity will pick up by 50% in the second half of the year as vaccine rollouts continue, additional government stimulus funds begin flowing and confidence in property markets swells. Approximately 98% of investors across all regions globally are looking to expand their portfolios, with 60% seeking to increase by more than 10%. Around 88% of US investors polled plan to make their next investment as early as the first quarter of 2021.

Logistics and living sectors are among investors’ top three choices across all regions, the report adds. “Intense demand for these assets will require investors to broaden their geographic focus and build portfolios through joint venture platforms and local partnerships.”
So what’s next for the sector? Through the third quarter of 2020, industrial posted $55.4 billion in sales, according to JLL Research. That represents the second-highest tally for volume by sector through three quarters. Industrial pricing is up 7.4% year-over-year and 1.9% from Q2 to Q3 2020, according to Real Capital Analytics. Earlier this year, JLL predicted that demand for industrial real estate could reach an additional 1 billion square feet by 2025 as e-commerce sales continue to grab market share.
But it isn’t all roses ahead. There are two possible clouds on the horizon: overbuilding and tenants that are struggling with the pandemic.
“We’re capable of overbuilding anything given enough time,” Peter Linneman, principal and founder, Linneman Associates said on CBRE’s “The Weekly Take” podcast. “No matter how strong demand is, we have proven we’re capable of overbuilding anything.” The second dark cloud on the horizon is something Linneman thinks a lot of people miss: While landlords that lease to the Amazons of the world are in great shape, ones with harder-hit tenants could struggle.
Source: “Industrial Continues Its Boom Times Ignoring a Few Looming Clouds“

CRE Pricing Nudges Up In January With Higher Hotel Valuations

February 8, 2021 by CARNM

Green Street analysis predicts pricing uncertainties will clear sooner rather than later.

Pricing across a variety of property sectors remained flat in January, according to the Green Street Commercial Property Price Index—with the surprising exception of the hotel asset class, which posted unexpected improvements in valuation.
Green Street’s total price index increased by 1.1% in January, an uptick that reflects higher valuations for hotel properties and stagnation in other property sectors. The all-property index remains 7% below pre-pandemic levels.
Peter Rothemund, managing director at Green Street says that when transactions do start “we expect to see more upside surprises than the other way around,” and that uncertainty around pricing should clear over the next few months as dealmaking increases.
“Pricing of properties where the top line is less affected by the pandemic are flat to higher versus a year ago,” Rothemund says in prepared remarks. “Property types heavily impacted by shutdowns—or where the ultimate impact from Covid is unknown—are seeing weaker pricing. The exact magnitude of price declines in these sectors, however, is unknown given little product is trading.”
The Green Street Commercial Property Price Index was unchanged in December, when research showed a predictable price decrease of around 8% across all CRE asset classes last year. While industrial and manufactured home park values registered an increase of 10% in 2020, pricing in the hardest-hit sectors were in freefall by as much as 25%.
The hotel sector is grasping for light at the end of the COVID-19 tunnel as private equity and institutional investors begin returning to the market. Recent JLL research shows that private equity and institutional investors were responsible for 54% of total hotel transactions last year, and the firm predicts they’ll continue driving investment activity into 2021. In 2020, private equity raised $2.5 billion in closed-end funds for hotel investment, a level matching 2016 investments. JLL predicts resort properties will be the big winners in 2021 and will likely account for 35% of total hotel investment volume this year.
Source: “CRE Pricing Nudges Up In January With Higher Hotel Valuations“