Much of the discussion about commercial real estate through and after the formal pandemic has been a triptych. The asset classes include office, multifamily, and industrial. The first one quickly tumbled. The second and third were investment darlings. Retail was assumed to be on a crash-and-burn trajectory with extended and sustained pandemic closings.
Now? Retail is looking pretty good, according to an analysis by the Brookings Institution. A start to the story is retail having done surprisingly well during the pandemic while office did poorly. And multifamily — assumed to be an impossibly steady investment because people need to live somewhere, and houses are expensive — had comparable losses.
Using data from CoStar, Brookings noted that while CRE values usually move roughly in step, from 2019 to 2024, that has not held true. Office fell from $3.17 trillion to $2.43 trillion, a drop of $740 billion, or 23.3%. Multifamily went from $4.91 trillion up to an exaggerated height valuation beyond any other class of about $6.1 trillion. Then the asset class slid to $4.61 trillion. The end-to-end drop was $300 billion, or about 6.1%. But the drop from the high point to current value was almost $1.5 trillion, or roughly a 24.4% drop, a bigger dip than office.
Industrial netted an increase from $2.24 trillion to $2.91 trillion, an increase of 29.9%, the definite highflier. Retail had only a slight increase of $3.01 trillion to $3.03 trillion — up about 0.7%. But as Brookings separately pointed out. retail has been the most stable CRE asset class during the pandemic. In 2019, demand was $11.4 billion, with inventory at $11.92 billion. In 2024, demand is $11.61 billion; inventory is $12.11 billion. What makes the stability more remarkable is an interesting dynamic that becomes clear in the important net-lease segment.
After the subprime collapse, many investors became interested in multifamily. They bought, saw values go up, and then became exchange buyers, getting into retail and pushing up prices because they could afford to spend more to get what they wanted because of the tax advantages. “There were so many exchange buyers that they quite substantially moved the market,” Chris Lomuto, an associate vice president in Northmarq’s San Francisco region, told GlobeSt.com. Rising interest rates did away with the advantages and that money tap was turned off. There were far fewer exchange buyers willing to pay more, moderating prices and transaction sizes. That might also have become a stabilizing force.
Brookings looked at total returns — an estimate of the nominal rate of return on unleveraged property investments — by property type. The 2019-to-2024 comparisons of percentage return were industrial, 10.97% to 1.59%; multifamily, 7.26% to -6.54%; office, 4.56% to -5.02%; and retail, 5.3% to 3.56%. And at 4.08%, retail’s national vacancy rate was the lowest of the four asset types and at a five-year low, although the numbers can vary widely by locality.
The stability and resilience seem to have put retail in a good position for future investment.
