Tenants Test Office Waters With Shorter Leases
The office sector has yet to fully feel the impact of COVID-19, thanks in part to the prevalence of long-term leases when compared to multifamily and retail markets. But 2020 saw an increase of short-term renewals by office tenants, jumping up to 22.6 percent from a long-standing average that hovered around 10 percent, according to a trends report from Cushman & Wakefield.
What remains to be seen is just how much the widespread adoption of work-from-home practices will impact office demand and pricing. The Cushman & Wakefield report cited a net decrease of one million office jobs in April 2020 compared to pre-pandemic levels, which aligns with the -138 million sf in absorption since COVID-19. This space equates to 2.7 percent of all inventory, putting this latest crisis ahead of the dot-com bubble (2.4 percent) and the Great Recession (2.2 percent) in terms of overall impact.
Recreational, Residential Land Prices Inch Up in 2020
Commercial real estate weathered a difficult year in the wake of COVID-19, though the land market proved resilient thanks to growing demand related to changing economic and social patterns. In all, prices for land rose 2 percent in 2020, with volume in transactions increasing by 3 percent, according to the 2020 Land Markets Survey, released by the REALTORS® Land Institute in April. Land prices reflected the fortunes of various commercial real estate sectors. Land sales for residential purposes increased 6 percent and industrial use jumped by 4 percent. Recreational land, with a spike in demand by those looking to escape populous areas, jumped by 3 percent — the same increase as ranching land.
Respondents to a survey included in the report expect land to increase in value in 2021. Demand is outpacing supply, with 70 percent saying the availability of vacant land in their immediate market is insufficient.
The Outlook for Malls Varies by Geography, Market
The bifurcated retail market created by the pandemic isn’t something that can be defeated with just a vaccine. Overall, retail had a surprisingly steady start to 2021, with national year-over-year asking and effective rates declining only 1 percent and 1.5 percent, respectively, in 1Q2021, according to Moody’s Analytics. But malls remain a troubled subsection of the retail market — with vacancy rates hitting 11.4 percent, a 20-year record.
According to the Moody’s 1Q2021 retail report, average rent for mall properties declined 0.2 percent in this year’s first quarter, compared to 0.8 percent decreases in the previous three quarters. The report authors drew distinctions between mall properties, noting large malls in wealthier markets fared better than B- or C-class properties, which may have lost anchor stores before or during the pandemic.
Hospitality Sees Light at End of the Tunnel
Hospitality is hoping to see big gains in the summer and fall of 2021, thanks to increasing vaccination rates and the easing of economic and social restrictions. According to a recent report from CBRE, 1Q2021 will likely mark the end of declining revenue per available room (RevPAR).
RevPAR declined to $42.36, a decrease of 34.9 percent year-over-year in 1Q2021. This figure is boosted by reopening luxury/high-end hotels, with only 15 percent of properties closed in April 2021, compared to 54 percent a year prior. The average daily room rate in “upscale” and “upper upscale” properties saw the largest decline year-over-year, both declining around 15 percent. Midscale (approximately 1 percent) and economy (6 percent) hotels were the only market segments to see increases.
Virginia Beach, Va., was the top performing market in 1Q2021, down by just 15.6 percent in RevPAR, with nine of the top 10 markets in the South or Southern California.
Hospitality Properties Commonly Converted to Multifamily
Adaptive reuse is a concept many see as a potential solution for mismatched supply and demand. A May report from the National Association of REALTORS® cited 187 hotel-to-multifamily conversion projects by survey respondents. Of those, 57.2 percent were to traditional multifamily housing, followed by seniors/assisted-living housing
(11.2 percent), student housing (7.5 percent), and temporary shelter housing (6.4 percent).
The survey also highlighted specific findings in the hotel/motel properties:
- 55 percent of projects required an application for rezoning.
- Most properties were not extended stay with kitchen facilities (79 percent).
- 47 percent of properties cost between $25,000 to $50,000 per room for full conversion.
Macy’s Plans $235M Skyscraper Development Atop Flagship Store
After a year of rough headlines for stalwart retailers like J.C. Penney, Sears, and the like, Macy’s made an announcement that showed all is not lost for legacy brands. The New York-based company unveiled plans to build a skyscraper above its Manhattan flagship store that will be a part of a $235 million investment in the immediate neighborhood. While particulars of the development are subject to city approval, Macy’s aims to create 1.5 million sf of office space in a building that could top 75 stories.
In addition to office and retail spaces, the development aims to create a car-free pedestrian space with increased access to bus and train stations. Plans also include improving elevators and gateway entrances to the area. The Macy’s store at the site, with more than 1.25 million square feet of retail space, will remain open throughout construction.
Supply, Rents Both Running Strong in Industrial Pipeline
The industrial market looks to keep rolling through 2021 after being the success story of CRE during the pandemic. National rents have increased an average of 4.4 percent, up to $6.53 per sf, in the past 12 months leading up to March 2021, according to a Yardi Matrix outlook. Supply appears to be in line with healthy demand, with 367.8 million sf of industrial property under construction. Completions are forecasted to top 250 million sf, slightly above 2019’s total.
Rent increases were most significant in or adjacent to port areas, with California’s Inland Empire (8.2 percent), Los Angeles (6.9 percent), and Seattle (6 percent) topping that list. Nashville, Tenn., also posted a strong year of rent growth at 6.6 percent. Vacancies remained steady at 6.1 percent compared to March 2020. Strong vacancy and rent growth figures, according to Yardi, show how new space has easily been absorbed even as 10 percent of all stock has reached the market since 2016.
Casinos Hit the Jackpot as Economy Reopens
The casino business has long been synonymous with the customer perks it offered to lure business in a competitive market. Whether it be a complimentary suite at a swanky Las Vegas resort or a free buffet at a suburban casino, these incentives, the thinking went, helped build customer loyalty and keep folks coming back.
But surging demand has casinos raking in profits. Meanwhile, operators have learned to decrease costs on labor, amenities, and freebies. According to Bloomberg, Penn National Gaming Inc. reported a 77 percent increase in 1Q2021 profits in May compared to 2020. Its Margaritaville Resort Casino in Bossier City, La., tripled its year-over-year income in March 2020, jumping to $19.7 million from $6.5 million a year earlier. The month-to-month increase was 52 percent.
While it remains to be seen if this is a short-term bump or a lasting trend, market experts are hopeful a more carefree U.S. population could lead to another Roaring ‘20s.