Jonathan Weiss on Ups and Downs in the 2021 Commercial Real Estate Market
The commercial real estate market has experienced both record breaking highs and unexpected lows in 2021. The Covid pandemic negatively affected a wide swath of the industry, especially in relation to supply shortages, but recovery is in progress.
Jonathan Weiss, a commercial real estate finance professional from Greenwich, CT, shares his analysis of the 2021 commercial real estate market and provides explanations of the market’s ups and downs.
The Pandemic’s Effects on Commercial Real Estate
Before beginning any discussion of the state of the commercial real estate market in 2021, Jonny Weiss thinks that we must first understand what happened during 2020 to precipitate today’s market conditions.
The office, retail, and hotel segments of commercial real estate were dealt the most severe blows. covid related lockdowns and remote work had a devastating impact on all three market segments. Hotel occupancy rates plummeted as accommodations were shuttered for all but ‘essential’ stays.
According to the National Association of Realtors, in the third quarter of 2020, office occupancy declined by 74 million square feet compared to the fourth quarter of 2019.
The industrial sector was not battered as severely by covid shutdowns, but it still experienced some declines in occupancy. Net absorption of industrial space declined from 80 million square feet to 62.1 million square feet in the third quarter of 2020.
Recovery in the Market
Commercial brokerage firm Cushman and Wakefield has projected that the office property market will continue to surge in 2021 and beyond as office occupancy rates and job numbers stabilize. Of the 2.9 million jobs lost, 2.2 million have been regained. Remote work policies are still in place for some employers, but as restrictions have loosened, more and more office staff are returning to the physical office.
Areas of Strength in the 2021 Commercial Real Estate Market
Commercial real estate should be broken down into sectors in order to fully understand market movements. Each sector (retail, office, warehouse, industrial, etc.) is affected differently by current economic conditions, and it pays to understand how prevailing conditions affect prices and vacancy rates.
One area that has been a bright spot in 2021 is the warehouse market. The skyrocketing demand for e-commerce has led to expansions for companies that sell online.
Warehouse and fulfillment center space is at an all-time low vacancy rate with record prices. According to CBRE, almost 100 million square feet of warehouse space was absorbed during the first quarter of 2021. Lease prices went up 7.1 percent between the first quarter of 2020 and the first quarter of 2021 to a high of $8.44 per square foot.
Certain areas of the country are experiencing amazing levels of growth in the industrial market in general. Northern New Jersey saw a 33 percent rise in base rent compared to 2020. Rental rates are being driven up by bidding wars.
Areas Where Improvement is Needed
Hospitality properties are still experiencing some downturns in 2021. Many restaurants and hotels have reopened and are operating at pre-pandemic levels, but up to 10 percent of U.S. restaurants have permanently closed. These vacant properties are a financial drain while they remain unoccupied.
Predictions for 2022 and Beyond
Looking at the current state of the commercial real estate market with its myriad ups and downs, Jonathan Weiss has researched predictions on how the market will fare into 2022 and beyond.
When it comes to the office sector, it is unclear whether it will rebound as quickly as the industrial sector. Many offices have made telework a permanent option for their employees. This may result in a lower probability that companies will be looking at office space expansions. According to the National Association of Realtors, office vacancies are expected to stay at around 16.5 percent in 2022.
The industrial sector, led by a surge in warehouse properties, will likely continue to be the leader in commercial real estate as e-commerce sales figures continue to climb. Increased demand for industrial space could lead to the conversion of vacant retail spaces like shopping malls into warehouse spaces.
Possible Impact of the Delta Variant
It is possible that the ongoing surge in the coronavirus delta variant will lead to further shutdowns in the already acutely affected areas of the south and midwest. In these areas, commercial real estate may receive more devastating blows, especially among retail, restaurants, and office space.
Understanding the Current Real Estate Market
Potential real estate investors should fully research the state of the 2021 economy and investigate predictions for coming years before putting capital into the market. In certain sectors like warehouse space, an investment might be considered favorable. The downturn in office space and certain hospitality properties have created select discounted buying opportunities, mostly off-market, but generally, the current environment in these sectors may imply that it is best to wait for further recovery before laying out capital.
Jonathan Weiss hopes that an economic upswing will lead to further improvements in most sectors of the commercial real estate market in 2021. Office space remains the major area of concern, but the gradual return to traditional work models may lead to an upswing in this sector as well.