Office Sector Sees Asking Rents, Vacancies Rise
Econ 101 teaches that prices should drop as supply increases. But when it comes to 2020, little if anything can be understood as normal. The office sector, according to a 3Q2020 report from Cushman & Wakefield, saw asking rents increase while vacancies also increased as the U.S. settled into its months-long fight against COVID-19.
The national vacancy rate hit 14.4 percent in 3Q2020, the highest level since 3Q2014. Meanwhile, net absorption was -41.3 million sf, an increase from -23 million sf in 2Q2020 and the largest decline in occupancy in the 25 years since Cushman & Wakefield began collecting data. Despite these troublesome data points, asking rents increased to $34.64 per sf in 3Q2020, an increase of 1.9 percent from the previous quarter. While counterintuitive, this increase is a sign that landlords are maintaining or increasing asking rents despite the difficult market conditions.
Cannabis Proves Popular Candidate in 2020 Election
One of the biggest winners of the 2020 election may have flown under your radar: cannabis. South Dakota, Montana, New Jersey, and Arizona all voted to legalize the use and/or sale of recreational cannabis. At the start of 2021, 15 states and Washington, D.C., have fully legalized marijuana.
Though the national trend continues toward increased cannabis production and sale, local markets can take time to establish themselves, with challenges ranging from identifying and acquiring viable real estate to passing regulations and dealing with licensing issues.
But cannabis is a growing niche in land real estate. In November, Subversive Real Estate Acquisition REIT became the second publicly traded cannabis REIT, after California's Innovative Industrial Properties.
Grocers' Growth Could Plateau in Next Decade
COVID-19 has split the retail market in (at least) two sectors, with grocers, convenience stores, and pharmacies doing well, while clothing stores and restaurants are among the businesses struggling to stay afloat. But gains made by grocers may face decreasing demand as consumer behavior reacts to economic reopening of businesses in 2021, according to a November 2020 report from Bain & Company.
Sales in 2020 at grocery stores in the U.S. jumped by 10 percent, though analysts expect steady revenues in 2021 with moderate forecasts ranging from 1 percent increase to 3 percent decline. The Bain team suggests grocers who act to capture and maintain market share will be best positioned for success in the coming decade, emphasizing improvements in e-commerce, supply chain efficiencies, and improved customer in-store experiences.
Lodging CMBS Delinquencies Decline After Painful Summer
The good news is that the delinquency rate for commercial mortgage-backed securities continued to decline in August after hitting a peak in June. The bad news? It remained at 22.96 percent — a level that was inconceivable in February 2020, when it was just 1.6 percent before the coronavirus thrashed the hospitality sector. According to Trepp, the overall delinquency rate dipped to 9.02 percent in August after reaching a peak of 10.32 percent in June.
Lodging remains the sector with the largest portion of its CMBS loans in delinquency, with retail as the second-most troubled market at 14.88 percent delinquency. Analysts suspect a bump in delinquency rates across market types could be in the future, considering dwindling federal relief and increasing COVID-19 rates across the country, but any increases in troublesome loans should be relatively modest compared to rates at the beginning of the pandemic.
Multifamily Absorption Rebounds After 1st COVID Wave
When the U.S. faced shelter-in-place orders across the country in the first half of 2020, apartment absorption plummeted. But the multifamily sector rebounded in July and August, with 50,000 units absorbed — nearly as many units as in the first half of the year, according to Yardi Matrix's study of 17 million apartment units in its database. As areas began to reopen after the initial shutdown, pent-up demand helped many metro areas rebound.
Cities in the Sunbelt and West saw solid absorption numbers, including Dallas (4,000), Denver (3,600), Atlanta (3,000), and Phoenix (2,100). Gateway metros struggled, with New York, Boston, Chicago, Los Angeles, and San Francisco accounting for a net absorption of -4,300 units. These urban centers are continuing to see many residents exit the market as office, retail, entertainment, and hospitality properties remain closed or limited in operation.
Younger Generations More Open to Work-Shop-Play Living Spaces
Big-box retail outlets were in trouble before 2020 brought along a once-in-a-century economic disruption. The problem, according to Shopping Center Business, isn't that retail is overbuilt; it's that it's “under demolished.” Potential replacements for large retail properties include mixed-use developments with hotel, office, residential, and medical uses.
Shopping Center Business found that younger people are more amenable to living in such all-in-one communities. Just 71 percent of people 55 years and older would consider such a development, compared to 80 percent of individuals from 39 to 54 years old and 85 percent of people between 21 and 38 years old. While mixed-use and adaptive reuse projects will continue to be hot topics in 2021, these properties appear to appeal to many younger consumers.
Cold Storage May Prove Crucial in COVID Vaccine
The U.S. boasts nearly 250 million sf of cold storage inventory, according to JLL, roughly 1.8 percent of all U.S. industrial space. Vacancies have been below 10 percent for decades, but look for demand to increase. With pharmaceutical companies working on hundreds of potential COVID-19 vaccines, cold storage could be a vital link in bringing doses to millions of Americans. Increased demand for last-mile delivery and growing supply has positioned the sector for success, with some locations capable of fulfilling vaccine-related needs.
“The vaccine is vital to save lives and help facilitate economic recovery,” says Peter Kroner, investor research, industrial, JLL. “We expect to see an increase of hundreds of thousands of square feet of cold storage space in strategic locations across the globe in order to meet demand.”
Boat Buyers in Market for Storage Spaces
Thanks to the social pressures associated with proper physical distancing in the face of the coronavirus pandemic, boat sales headed north for much of 2020. According to the National Marine Manufacturers Association, sales jumped 30 percent in the summer. But, according to Bisnow, consumers are now faced with the challenge of finding places to store them.
“The boater demand is growing like crazy, but the supply of new marinas is obviously not moving too much,” says Integra Investments Principal Victor Ballestas, during a November Bisnow webinar about the future of marinas. “That supply/demand constraint is where we think that the opportunity lies in the space.
For the near term, the future of marina space might be upward, with developers building multilevel properties that can store and retrieve boats automatically.