Every month, NAR publishes the Commercial Market Insights Report (CMI), which provides in-depth analysis and market insights into the commercial real estate market with a focus on multi-family, office, industrial and retail properties. This is especially important for tracking commercial property development during the pandemic since the report began in June 2020.
Gay Cororaton, Senior Economist, Director of Housing and Commercial Research, and Brandon Hardin, Research Economist, are the lead authors on the report. In these interview questions, they provide insights into the data, perspectives on how members can use the report, and the results that they found most interesting.
What makes this report different from other commercial reports NAR has produced in the past?
Gay Cororaton: The CMI report differs in terms of content, depth of analysis, frequency and relevance for our members. Since I came to NAR in 2012 and until the CMI was created, NAR had only published a quarterly market report, mostly using data from a survey of the NAR commercial markets and with no in-depth analysis by asset class and geographic market.
In contrast, the CMI report is published monthly, includes market trends in five real estate markets (apartment, office, retail, industrial and hotel), and we are starting to include more data at the subway level in the report. For example, here are the latest trends we're following:
- The commercial real estate market will recover from February 2021, but is still weaker overall than a year ago. Sales transactions in the first quarter were still 28% below the previous year's level. Commercial property prices continued to rise, but commercial property value is still 6% lower than last year.
- However, the pandemic has hit each sector differently, and the multi-family and industrial property market has been the toughest period during this pandemic year, while the hotel and office sectors have struggled the most.
- On the office market, which I am following more closely, the vacancy rate in the big cities has increased overall, while the vacancy rate in the secondary or tertiary markets has increased only slightly. The vacancy rates have risen sharply in San Francisco (+12.7 percentage points), Seattle (+9 percentage points), New York (+8.8 percentage points) and Austin (+8.3 percentage points), which is mainly due to the increase in space is sublet. However, the vacancy rates in smaller cities such as Tucson (+0.6 percentage points), Northern Virginia (+0.7 percentage points) and Long Island (+ 1 percentage point) rose only slightly.
Another feature that differs from the Quarterly Commercial Market Report in the CMI report is the featured "Insight Pieces" that allow us to delve deeper into new trends in property classes like ghost kitchens (June 2020 – the seminal theme of the CMI report) , Grocery delivery services (July 2020), adaptive retail reuse for industrial space (October 2021), rising rental trends for apartments in smaller cities as rents in large cities fall (November 2020), shifting multi-family demand towards suburban areas (January 2021) and how a hybrid working style could affect the demand for flexible office space (February 2021).
Brandon Hardin: This report is different as it provides more detailed analysis and market insights into the CRE markets and current economic conditions. In this report, we focus on office, industrial, retail and apartment buildings. In addition to providing in-depth analysis, the CMI goes beyond surface-level analysis as it examines certain key trends and insights that vary monthly. The monthly nature of this report differs from other reports that are quarterly or annually. This report provides our members with more macro-level information that they desire compared to some of our previous and current reports. This report is about keeping track of the markets and what happened.
What questions does this report try to answer? What data gaps does this report seek to fill?
Gay Cororaton: As a backdrop, the CMI report served in response to our commercial members' need for timely information on the impact of the COVID-19 pandemic on the commercial property market across property levels and geographic areas. This need was clearly expressed at the legislative sessions in May 2020, in particular the meeting of the Advisory Board on Commercial Real Estate Research. We responded quickly to this urgent need for information and prepared this report, which was published next month in June 2020.
In the CMI report, we track activity indicators such as sales transactions, trade prices, cap rates and distress sales. We track the commercial market conditions of supply and demand by examining absorption or changes in occupancy, vacancy rates, rents, leasing and completion. Last but not least, we track economic variables that affect commercial property demand, such as: B. Employment, retail sales, consumer income and expenses, and working from home. For example, we know that the number of people working from home quadrupled from 6% in 2019 to 21% in March, and that 58% of computer workers are still working from home. Until this proportion returns to the level before the pandemic, we assume that the vacancy rate in the office will remain high.
Brandon Hardin: The questions the report answers are where we have been and where we are now. The report accomplishes this by examining various sources of data to represent the entire CRE market landscape.
As a monthly report, did you notice any surprising changes in the data since the start of the report?
Gay Cororaton: One "surprise" I saw is that asking rents have not fallen despite the rise in vacancy rates. In the first quarter of 2020, the average rent for an office was USD 33.69 / sqm. ft. In the first quarter of 2021, the average rent for office space rose to $ 35.40, although the vacancy rate rose from 13% to 16.4% during that time. According to a survey of our commercial members, 55% said landlords make more concessions. So I think landlords are seeing the pandemic is a temporary, short-term shock. So instead of lowering their asking rents, they are effectively lowering the rent by offering concessions.
Related to this, some markets have seen phenomenal increases in office rents in some markets. For example, office rents in Fort Myers / Naples have increased by 23%, in Roanoke by 20% and in Colorado Springs by 17%. So something is driving demand in these markets. In Fort Myers, it's medical office space, and in Roanoke and Colorado Springs, it's the demand for booming commercial real estate that is driving demand for office space.
While the headlines are grim, there are pockets of growth and I am delighted that we can share these wonderful insights with our members.
Brandon Hardin: Yes. There have been a number of changes to the data since the start of the report. Given the frequency of this report, we can see the essence of trends by breaking down data more frequently. If we look at the current pandemic, this report has given us an opportunity to see how sectors are responding to all of their influencers. This report allows us to see some of the more transient and persistent shocks and trends as we analyze the data more frequently. Given that the report began in the early stages of the pandemic, we can see significant changes in the data. Have we seen any surprising changes? Yes we have got that. There were surprises around every corner as the report captured a hopefully one-off event (the coronavirus pandemic). The production of this new report in an unprecedented time has produced unprecedented results. So it is in a sense surprising that we have seen how resilient the markets are, despite the fact that CRE has rebounded the most and some are on a recovery path, despite seeing success from CRE and particularly certain sectors such as hotels and retail .
What aspects of this report do you find most interesting?
Gay Cororaton: The aspects that I find most interesting are the Insight pieces, where we dive deeper into emerging trends. As a researcher, these findings give me the opportunity to go deeper than the headings. For example, in February I gave an insight into how a hybrid working style can affect the demand for flexible office space. I learned a little more about the flexible office space market, starting with what "flexible space" or "collaboration" actually means, and getting a better understanding of the flexible space market. I learned that flexible space is called that because the leases are short term (as short as a month) and the lease can be as small as a desk or an entire floor or floors for institutional users. I have learned that flexible space operators have established niche markets along the flexible space continuum. So companies like WeWork are essentially targeting those who "work together" when an employee works in an open area that is either a "hot" seat or a dedicated seat. On the other hand, a company like Regus, for example, mainly serves institutional users who rent dedicated offices or entire floors. Flexible room rent grew by leaps and bounds before the pandemic, but only made up around 3% of total office inventory. However, technology users are the main customers. So it's not surprising that when workers were working from home during this pandemic, New York, San Francisco, Seattle, Austin, and Nashville markets saw huge spikes in vacancy rates.
Brandon Hardin: While I find all aspects of the report fascinating, I find the deep insights really interesting. This is the part of the report where the data has been studied in depth to uncover the treasures of CRE. I find this particularly interesting because, by delving deep into the data, you can reveal the hidden forces of trends and really understand who, what, when, where, and why certain CRE topics and fundamentals are. This is also interesting for me because we don't always stick to the basics of CRE in the Insights part. But we're peeling back like onion layers, which of the influential trends in CRE our members should know about.
How can our members use this data?
Gay Cororaton: Members can use the data to understand general market trends or use the data to inform their transactions. One example of this are the cap rates. Falling cap rates mean that commercial prices or valuations are solidifying. Cap rates are also a starting point for assessing whether the price of a property is over- or undervalued. In February, the risk diversification for the office acquisitions was 5.4% (5.1% a year ago). So buying an office property with a risk spread of 5.5% may mean the property is overpriced, or it may be fair priced because of the less risky cash flow, but in both cases the risk spread, The report serves as a starting point for the valuation of a property.
Brandon Hardin: Our members can use this data to structure approaches to how real estate is developed, valued, acquired and bought. This data along with our fantastic members is invaluable as it gives them additional resources to serve their customers better and more efficiently.