Market Trends in Commercial Real Estate
Medical Office Looks for Reopening Rebound to End 2020
Seven months after the initial shock of the coronavirus pandemic to the American economy, real estate analysts are now offering insights into where certain sectors may go in the near future. For the medical office market, the final few months of 2020 look to be slightly soft, according to the U.S. Office Market Report from Transwestern and Devencore.
The report suggests activity may struggle to keep up with 2019 levels, as tenant walk-throughs, leasing, and development are projected to decline slightly. But 80 percent of respondents to a survey expect asking rents to remain at pre-COVID-19 levels, while 70 percent expect more robust concession packages. The long-term outlook for the medical office sector also remains bright, thanks to pent-up demand and a growing need for medical facilities (in addition to telehealth services).
USDA Sees Little Movement on Land Values
Despite the recent national economic turmoil, average farm real estate values held steady in 2020 compared to the previous year. The average cost of an acre of land is $3,160, according to the United States Department of Agriculture's National Agricultural Statistics Service annual report. The average costs for an acre of cropland and pasture also remained unchanged in the past year, holding at $4,100 and $1,400, respectively.
While states experienced slight variations in average prices for land, no single area saw dramatic increases or contractions. The Midwest, for example, saw slight decreases in Wisconsin (down 2 percent), Iowa (down 1.7 percent), and Michigan (down 0.2 percent), while Illinois (up 1.6 percent), Indiana (up 0.3 percent), and Ohio (up 1 percent) realized modest gains.
Nearly 5 Out of 6 NYC Restaurants Unable to Pay Full Rent in July
Restaurant and bar owners in New York have had plenty of restless nights since the COVID-19 pandemic hit in March. A new report from the NYC Hospitality Alliance found that 83 percent of these establishments were unable to pay full rent in July. Additionally, 37 percent of bars and restaurants paid no rent at all.
Surveying nearly 500 owners and operators of these businesses, the NYC Hospitality Alliance found slight increases in missed rent obligations from June, where 80 percent were unable to pay full rent and 36 percent pay no rent. Indoor dining was prohibited throughout July, with outdoor dining and takeout/delivery options unable to make up the lost revenue.
Respondents cited difficulty in reconfiguring leases as a continuing challenge. Nine of 10 bar and restaurant owners/operators said landlords would not formally renegotiate leases, while 61 percent declined proposed rent deferrals.
Hotels Forecasted to Lose $75B in Revenue
One of the first casualties of COVID-19, hotels are looking at $75 billion in lost revenue in the next year, according to Magid's HTL Forecast Tracker. While parts of the national economy start to show signs of life, such as retail and office, hotels are faced with difficult prospects as travel and leisure lag. The pandemic is projected to result in a 29 percent decline in room occupancy in the 12 months following the report's release in mid-August.
The research included a survey of consumers that paints a bleak picture, where consumers are becoming less likely to stay at a hotel in the near future. In the next two years, only 71 percent of respondents expected to stay in a hotel, down from figures of 74 percent in June and 89 percent in March. Looking a year ahead, 56 percent of consumers planned for a hotel visit, compared to 62 percent in June and 79 percent in March.
School Year Starts With Plenty of Vacant Student Housing
The situation seemed to make sense - colleges reduced costs (and headaches) by allowing private developers to handle student housing, with funds raised through municipal bonds. But COVID-19 has blown a massive hole in that plan, with a tenant pool left dry as many students are staying away from campuses.
A recent report from Bloomberg examined some high-profile projects that are in serious trouble. One example is the new $90 million dorm at the California College of Arts in San Francisco. Offering two-bed, dorm-like rooms for $1,400 a month - undeniably affordable in a notoriously pricey market - the building was woefully vacant by the end of July, with only 29 percent of rooms re-leased within a few weeks of the first day of school. Another housing development, financed by $228 million in bonds at Florida International University, only had 77 percent of units leased when school began in the fall, with the goal being 90 percent.
Chicago Eyes Mixed-Use Projects to Boost Struggling Communities
The Chicago Department of Planning and Development issued requests for proposals for three projects in underutilized sites in neighborhoods that have struggled to attract large investments. The goal, according to DPD Commissioner Maurice Cox, is to produce mixed-use, pedestrian-friendly projects that will encourage further investment in surrounding communities.
City officials are considering tax increment financing, tax breaks, and purchase-price write-downs to assist potential developers. The three targeted sites are:
- A 32,200-square-foot site in Austin on Chicago's West Side that includes a 14,340-sf bank building for mixed-use rehabilitation.
- A 23,000-sf site that includes six parcels of land on the South Side that can be used for commercial/residential buildings.
- Two sites, totaling 4.28 acres, in Englewood for a walkable, mixed-use town center.
Warehouse in Demand in Markets Large and Small
Industrial has stood out in terms of performance in the tumultuous first half of 2020, and the market sector appears primed for continued strong returns to come. According to Beyond the Global Health Crisis, a special report from Marcus & Millichap, the pressures related to stay-at-home orders and changing consumer behaviors will increase demand for last-mile inventory warehouse/industrial space.
Vacancy rates in both primary and secondary/tertiary markets have ticked up slightly since the pandemic hit, sitting just above 5 percent after 2Q2020, but year-over-year rents for both market segments continue to increase. The report highlighted the crucial role of warehouse facilities near population centers (from primary to tertiary), with demand growing as online sales of grocery and household items become a part of everyday life for millions of Americans.
Data Centers Attract Interest Despite Overall Instability
Considering the consequences of national and worldwide shutdowns in the wake of the coronavirus pandemic, data centers are positioned to remain in demand. Workers and students depend on remote connections, so the need for these large facilities should only increase. Investors are taking note - with some willing to pay a premium.
According to 2Q2020 data from Real Capital Analytics, newly purchased data centers had an average capitalization rate of 5.5 percent, a decrease from the 6.4 percent in 2Q2019 and a significant drop from the all-time high of 7.9 percent in 2Q2012.
While many specialty properties expected declining or steady demand in 2020, data centers still hold promise. Overall investment is down across all specialty sectors, but data centers are buoyed by demand generated from Amazon and Google, which are looking to acquire such facilities in addition to those they construct on their own.