Brighter Spots: Land, Flats, Industrial

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The coronavirus pandemic intensified its impact on sales and leasing transactions in the second quarter of 2020. Retail, hotel and office properties were hardest hit, while residential, industrial and real estate assets were only marginally affected. These are some of the findings of the latest trends and outlook in the commercial real estate market, a quarterly survey by the National Association of REALTORS®.

Sales and leasing are falling across all sectors

Almost 500 REALTORS® provided information about their sales volume. Respondents reported an average year-over-year decrease in sales transactions of 5% in the second quarter, mostly transactions less than $ 2.5 million. For transactions valued at $ 2.5 million or more, revenue was down 68% year over year, according to a report from Real Capital Analytics.

REALTORS® saw the biggest drop in sales for office, retail and hotel companies. Sales fell by 6% to 7% compared to the previous year. Residential and industrial property sales were down 4% year-over-year while land sales were down 3%.

With property sales valued at less than $ 2.5 million, retail prices declined 3% year over year in the second quarter of 2020. On transactions of $ 2.5 million or more, trading prices still rose nearly 4%, but that increase is less than the prior-year Coronavirus period (6% year-over-year in January 2020).

Commercial real estate held by REITs declined 9% year over year, according to the Green Street Commercial Property Price Index.

The Effects of Home Orders

In the small commercial market, according to the NAR study, prices for all types of commercial real estate fell, with the largest falls in hotels (–7%), retail (–6%) and offices (–5%). Housing prices fell by 2% compared to the previous year. Commercial property prices fell the least, by around 1% year-on-year.

With on-site housing policies closing offices and businesses in April and May and social distancing policies that reduce foot traffic in shops, restaurants, bars and hotels, the vacancy rate averaged 25% across all commercial sectors, compared with 7% in the first quarter of the year. With travel stopped, hotel vacancies rose from 10% in the first quarter to 73% and retail vacancies rose from 9% in the first quarter to 20%. REALTORS® reported a smaller increase in job vacancies in industrial and apartment buildings.

Collection of rent due varies

NAR also recently surveyed members who are primarily involved in leasing and property management. The lease terms report found that single-family homes, apartment buildings, offices and industrial buildings were recovering at least 90% of rents due in the second quarter. However, only 70% of rent due was collected from tenants in shopping centers and freestanding shops, and the proportion of rent collected fell to only half among tenants in shopping centers.

The CARES Act's $ 600 Weekly Pandemic Unemployment Assistance (PUA), which ended July 31, allowed tenants to maintain rental payments. States had until September 10 to apply for funding under the Lost Wage Assistance Program, a partnership between the Federal Emergency Management Association and the Department of Labor that promises federal aid. However, the benefit will be less generous, increasing the risk that a higher proportion of the rent due in the coming months will not be collected.

64 percent of those surveyed said that landlords offered rental options. The most common form of support was to enable the tenant to pay the rent over a period of several months. Rental payment options offered include:

  • Rent reduction or rent reduction
  • Frequent, smaller rental payments
  • "Other payment options" such as "no late fees or charges", "use of the deposit" and "no increase in rent if the lease is extended".

69 percent of respondents said that landlords of non-residential properties offered rental payment options. The support consisted mainly of enabling the tenant to pay the missed rent over several months and to lower or lower the rent. Respondents mentioned other options including:

  • Extension of the rental period for deferred rental
  • Extended term of rent reduction
  • With deposit for rent

Investors aim for higher returns

With ongoing uncertainty about the direction of the economic recovery – caused by the recurrence of coronavirus cases, the expansion of work from home and the impact of increased online shopping – investors are demanding higher returns on long-term commercial property demand. A measure of the increased risk aversion is the difference between the operating income (cap rates) and the risk-free 10-year government bond. A wider spread means that investors are seeking higher returns to offset the increased risk of investing in the asset. Risk diversification (cap rate minus 10-year T-bond rate) rose in the second quarter of 2020 from just 4% in the first quarter of 2019 to around 6%, both in the large commercial real estate market (transactions of USD 2.5 million and more)) and the small commercial market (less than $ 2.5 million).

Outlook: the next three months

REALTORS® expected the difficult environment to continue at least in the third quarter. They expected a decline in sales transactions for all types of property and a continued high vacancy rate. Apartment buildings are still the strongest line of business as turbulent times generally drive demand for apartments and e-commerce deepens the retail sector.


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