Institutional Bellwether or a Warning Shot?

It was reported by Peter Grant in this week’s Wall Street Journal’s Property Report that the commercial real estate sales are still on a big trajectory. The article entitled, “Covid-19 Fuels Best-Ever Commercial Real-Estate Sales,” states the winners in the past year were multifamily and warehouses in the property sector and the Sunbelt in the demographics sector. None of this is a surprise as we’ve seen a continuing of the population moving to the southern climes and a strong demand for apartment rentals in these areas and a significant growth in the need for logistics and distribution and much of this brought on by the pandemic.

Tracking data from a recently released report authored by Alexis Maltin from the data firm Real Capital Analytics shows that a record of $809 billion of total was transacted in 2021 which is 33% increase over $600 billion if 2019 which held the previous record.

As an asset class, commercial real estate is more than holding its own. However, digging a little deeper into the data and mentioned in this article is something a little more startling which is that Manhattan took a big tumble and falling to ninth overall in transaction volume. Much of this is attributed to the uncertainty surrounding the office market where the largest transactions typically occur. According to Jim Costello, senior vice president, Real Capital Analytics, “It’s never been like that…Manhattan has just fallen of the map relative to its size.”

Of course, sitting on a 25-30% occupancy rate in offices at the moment has not helped and the uncertainty of what the future of the office will look like also contributes to the current climate. If the past is prologue in any way, we’ll definitely see NYC and other highly dense urban areas return to what is considered “normal” occupancy. There’s no shortage of leasing activity in this market which is a positive marker and shows a good dose of optimism. It really comes down to how this space is utilized on a five-day basis and how much space a company will really need moving ahead.

It's apparent that institutional investors are still quite bullish on commercial real estate though it appears tastes are changing. As Carly Tripp, Nuveen's head of real estate investment stated in this same article, "Everything is lining up for a strong year." Along these same lines in the piece, Josh Zegen, managing principal remarked, "Whether you're a pension fund, an insurance company or an endowment, you need to put your money out."

And this potential shift is not limited to urban offices as we see new interest in the suburban markets which are getting very competitive in terms of investment capital. We’re also looking at a generational shift in behaviors that we took for standard operational procedure including travel and tourism, entertainment, shopping, work life along with corporate travel and expenditures. Whether we like it or not, things have changed on every level of our lives.

Chances are whatever we return to, most likely it will be seventy-five to eighty percent of what it used to be. On the other side of this equation, a twenty-five percent change in habits is more than a warning shot.