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Commercial Real Estate Valuations Are So Hard-Hit That CBRE Warns Could Fall ‘Another 10%,’ After Saying Earlier They ‘May Come Down 15%, 20%’

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Workers will likely spend 20% to 25% less time in the office than before the pandemic, according to the head of real estate brokerage CBRE Group.

Chief Executive Officer Bob Sulentic said companies such as CBRE are seeking to balance in-person work with the recognition that people don’t want to spend hours in traffic.

The rise in remote work since the pandemic has had far-reaching implications for the real estate industry, including property owners that Sulentic’s company counts as clients. Office landlords have been confronting declining tenant demand as more companies adopted remote-work policies. That’s pushed the office vacancy rate in the US up to 18.4% in the third quarter, according to CBRE.

Landlords have also been pressured by the rise in borrowing costs, which has contributed to a nearly 21% decline in office prices in the 12 months through October, according to real estate analytics firm Green Street. Investors including Brookfield Asset Management Ltd. have defaulted on debt and walked away from buildings.

Sulentic said higher borrowing costs have dented commercial real estate valuations more than his firm originally forecast.

“We thought values may come down 15%, 20%. We now think that may be another 10%,” Sulentic said.

He noted price declines were “most acute” for office buildings.

 

Source:  Fortune

 

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February’s CRE Sales Volume Up Nearly 34% From January

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Retail led an unbalanced sales volume month in February for commercial real estate’s asset classes, according to a report last week from Colliers.

Overall, February’s volume totaling $25.1 billion was up nearly 34% from January sales levels, an above-average month-to-month increase.

Retail was the most heavily traded asset class in February, with $9.1 billion of activity, buoyed by the take-private deal of STORES Capital REIT. (Without it, the volume would have been $2 billion, and it would have fallen to a similar extent as other asset classes).

Office volume in commercial and business centers (CBD) was short of the $1 billion mark for the second month in a row – and the first time since 2010.

CBD office cap rates are up 70 basis points over the past year, and MSCI notes pricing is down 2.2%, though “recent cap rate movement would suggest a far more rapid price adjustment.”

Industrial volume got back to where it was in 2015-18 by increasing 63% from January. The STORE Capital REIT deal was the main reason why.

MSCI reported a 4.4% annual drop based on January to February pricing.

Multifamily sales volume is moving downward at a faster pace, with February’s $4.8 billion traded was the lowest monthly total since February 2012. A darling for so long, it is now the third-least-traded asset class for the first time since January 2015.

MSCI’s repeat sale index shows an 8.7% annual price decline, the sharpest of any asset class.

Hospitality sales volume was volatile as it was down 53% compared to last year but up month-over-month.

MSCI reports the strongest price appreciation of any asset class over the past year at 5.4%, and unlike other asset classes, when annualizing monthly statistics, hospitality shows a 2.1% gain on $2 billion in trades for the month.

 

Source:  GlobeSt.

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‘Near Record’ Amounts Of Idle Capital Could Boost Sales This Year

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‘Near record’ amounts of capital are sitting idly on the sidelines amid economic uncertainty, and how (and how quickly) it’s deployed this year will be “major factors” in overall sales volume, according to new research from Colliers.

In a new report, the firm says that value-add, opportunistic, and debt capital look to be the most active, with debt plays yielding “equity-like returns.”

“Liquidity can be found, but from different sources,” the report notes.

Investors are turning to defensive strategies, with multifamily and industrial garnering the most activity as “safe harbors” due to strong fundamentals and durable cash flows. Among alternative assets in Colliers’ survey, life science, data centers, and student housing ranked first, second, and third  due to “demographically driven upside and strong fundamentals,” which analysts predict will continue to draw investor interest.

Grocery-anchored retail is also expected to remain resilient while luxury hotels have posted “incredible” fundamentals.

And as for office, “trophy properties are vastly outperforming all others, demonstrating the need for upgrading and occupiers’ focus on ESG-compliant assets,” the report notes. “This need for new product will be difficult to meet, with capital investment preferring to upgrade existing assets. Conversions, repositioning, and recapitalizations will all be common themes throughout the year as the office sector evolves. Distress will emerge.”

 

Source:  GlobeSt.

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Commercial Real Estate Predictions For 2022

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The commercial real estate industry has undergone a rocky road over the past two years, as pre-Covid-19 predictions have been upended due to the unforeseen nature of the pandemic. But as the world begins its shift toward post-pandemic life, I believe that commercial real estate is on track for a serious rebound this year. While not every area of commercial real estate is set to see an upswing, there are a few predictions that are safe to make based on trends in the market.

Here are a few of my commercial real estate predictions for 2022:

Commercial Real Estate Will Bounce Back

First and foremost, the biggest prediction for 2022 is the recovery of the commercial real estate industry. While it has taken a beating during Covid-19 (and the Omicron variant does present a hurdle toward full recovery), sound fiscal policy could help the industry recover. Monetary policy could also ease some of the long-term inflation pressures as commercial real estate values rise. The demand for real estate will be high, though the areas in which people are investing might look a little different than in previous years.

Industrial Real Estate Will Keep Growing

Industrial real estate has blown up over the past year thanks to the rise of e-commerce. Online retailers such as Amazon are driving the construction of warehouses to house their products, while retailers like Walmart and Kroger are snatching up distribution facilities left and right. Manufacturers are also going to keep investing in commercial real estate as they increase the amount of inventory they keep onsite.

Office Real Estate Won’t Be Out Of The Woods Yet

The one part of commercial real estate that still has some trouble ahead is office real estate. While it won’t be terrible, demand won’t be nearly what it was in previous years as companies continue to hold off on returning to the office. As working from home both full-time and part-time becomes more of the norm, office space utilization will most likely be on a downward trend.

Hospitality Will Rebound

It will be good news for hospitality, as business and leisure travel seem inclined to grow this year. The travel boom will drive luxury hotels to continue to embark on renovation projects that may have stalled during the pandemic. These projects will likely be driven by both city centers and the hotels themselves as the demand for more hospitality spaces continues its upswing.

The Supply Chain Will Be Retooled

The supply chain has suffered quite a blow during the Covid-19 pandemic, which will require some retooling over the next year. Because the space near seaports is not widely available, many developers will have to invest in commercial real estate inland. In order to account for rising transportation costs, manufacturers will most likely have to add distribution facilities in closer proximity to manufacturing facilities.

Although nothing is set in stone for the future of commercial real estate, it’s safe to say that the economy behind commercial real estate is here to stay and that these predictions are well on their way to becoming reality.

 

Source:  Forbes

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2021 CRE Investment Hit A Record $746B

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CBRE released its 2021 US commercial real estate investment volume and announced a record $746 billion, up by 86% from 2020. The fourth quarter of 2021 also saw a record $296 billion, increasing 90% year over year.

For a pre-pandemic comparison, volume in 2019 was $542.4 billion, down 1.8%, and Q4 that year was $152.7 billion, down 8.1% year over year.

There’s been a lot of evidence throughout 2021 that the annual tally would be spectacular, with pandemic rebounds, volumes of cash sloshing over the sides of bank accounts as they looked to be invested, and concerns about inflation and the need for hedging. But it’s good to remember that these factors also drove up prices and that the actual deal volume could be different.

Multifamily was the hot sector in 2021 at $136 billion for the fourth quarter and $315 billion for the year, giving it a 45.9% share of the quarter and 42.2% of the year.

For the whole of 2021 across all types of investment, industrial had a 21.5% share; office, 18.3%; 9.9% for retail; and hotel at 5.7%.

By market, greater Los Angeles was at the top. Investment volume there was $58 billion, with New York coming in second at $49 billion and the $41 billion in Dallas coming in third. The fastest growth was in Las Vegas, where $9.7 billion was a 231.8% year-over-year increase. Houston saw 190.5% growth overall at $25.8 billion, while South Florida’s $27.9 billion was a 178.6% jump.

Multifamily saw the fastest growth in Las Vegas, with a 394.3% year-over-year jump. Next was Houston at 379.0% and South Florida’s 240.3%.

In office investment, the top three regions for growth were Austin (410.4%), Richmond (359.5%), and South Florida (277.7%).

Growth rates in industrial were lower, which may owe to the massive rush to build and spend in 2020 during the pandemic, raising the question for investors of whether growth could continue to lag, or if it might be a case of prices topping out to some degree. Top three regions: St. Louis (144.9%), Sacramento (143.8%), and Austin (142.5%).

Year-over-year retail investment was generally higher than industrial, with Seattle seeing 248.8%, Phoenix at 217.8%, and Houston, 210.6%

Volumes of hotel investment were overall lower, but the growth was remarkably higher in Seattle (1612.0%), Tampa (1284.8%), and Florida’s panhandle (1181.3%).

Big sources for cross-border investment were Canada’s $20.9 billion and $15.2 billion from Singapore. The two countries were far and away the biggest sources.

Final quarter numbers on cap rates show that the “everything is driving lower and lower” discussion might be over reactive. Even warehouse industrial saw cap rates of 5.47, not the “threes” many suggest as averages. Multifamily caps were lower, but still in the high fours. The highest: hotels and an average 8.33.

 

Source:  GlobeSt.

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