Institutional-quality retail assets with creditworthy tenants may “rounding a corner,” with rent collections and values improving, while bidding wars are breaking out for some industrial properties amid rising rents and continued strong fundamentals. That’s according to “Heating Up,” the latest RERC ValTrends report from SitusAMC Insights, highlighting key developments and valuation trends in commercial real estate in Q1 2021.
“The lifting of COVID-19 restrictions is obviously a huge relief for retail investors and tenants,” said Peter Muoio, PhD, Senior Director of SitusAMC Insights. “Nevertheless, the growth of e-commerce still presents uncertainty for the retail sector overall, while driving continued demand for industrial space.” ValTrends includes proprietary survey data of investor sentiment on return vs. risk – the extent to which returns are commensurate with the amount of risk in the CRE market; as well as value relative to price, indicating whether the CRE sector is underpriced or overpriced. The latest data show investors’ perceived risk of retail lessening in the most recent quarter, though their view of price relative to value did not change.
Some Retail Values Rise, Office Occupancy Edges Up
Rent collections at institutional-quality retail properties are back to pre-pandemic levels, and collections across all subtypes are improving, prompting appraisers to adjust credit losses downward, increasing values about 1 percent to 2 percent, according to the report. Brokers already report increased investor interest in the very limited supply of retail properties for sale, but it’s all about quality, with concerns remaining about the stability of net operating income for most Class B and Class C properties. “Our data show investors still viewing retail overall as overpriced, even as they have scaled back their perception of risk as the pandemic has eased and more and more venues are fully open,” Muoio said.
As for the office sector, occupancy in major metros, now at one-third of pre-pandemic levels, is slowly growing. Limited transaction activity makes it difficult to see potential mid- to long-term downsizing patterns yet to emerge. A few areas are experiencing market-rent increases due to higher leasing activity, including Seattle, Chicago and Miami. The latter is booming, with office transaction volume skyrocketing 478 percent year over year in Q1, according to RCA data, reportedly fueled by firms fleeing expensive metros.
Industrial Sees Bidding Wars, Job Growth Fuels Apartment Demand
In the top-performing industrial sector, rental rates are rising, investment rates are compressing, and even secondary markets showing some strength. “E-commerce is still thriving driving demand and investor interest in logistics space, and the current administration’s proposed policy on infrastructure, as well as the general improvement in economic growth, should lead to further demand,” Muoio noted. Very strong demand is facilitating multiple bids, unsolicited offers and deals closed significantly over the asking price, even for average-quality properties, analysts note. In many markets, a cap-to-discount rate spread of 100-125 bps “is not uncommon.”
A lack of affordable housing and job growth are fueling strong demand for apartments, stabilizing last year’s short-term rent suppression and moderating credit losses, according to the report. Heading into the summer, reduced concessions and growing occupancy will continue to push net effective rents higher. Investor demand is particularly strong for suburban affordable multifamily assets, but prices depend on the investment rates, which “are considerably lower” than in 4Q 2020, the report noted.
Hotel Transactions Spike in NYC
Finally, optimism for the hotel sector and demand growth expectations “are speculative at the moment,” the report noted, with expectations for a prolonged recovery of four to five years in most markets, and roughly three years in New York City. Occupancy was 50.8 percent in 1Q, up nearly 160 bps from the 2020 average, but 150 bps lower than 2019, according to data from Reis. Meanwhile, RCA reports that transaction volume rose 46 percent year over year in the nation’s top six metros versus only 4 percent in non-major metros. “Investors are betting big on New York City’s long-term success,” Muoio said, noting that transactional volume in the five boroughs increased 955 percent year-over-year.