The calculus for which asset classes are likeliest to demonstrate strong growth continues to shift as the pandemic appears to be receding. Patterns in labor shortages, supply chain issues and material costs have managed to solidify through the third quarter of 2021.

Lee & Associates’ newly released Q3 2021 North America Market Report dissects third-quarter 2021 industrial, office, retail and multifamily findings, with a focus on where demand is moving and the challenges facing each asset class. Lee & Associates has made the full market report available at this link (with further breakdowns of factors like vacancy rates, market rents, inventory square footage and cap rates by city).

Below is a bird’s-eye overview of four commercial real estate asset classes as general categories, broken down to frame each through the trends and complications they faced up to the fourth quarter, according to Lee & Associates’ research. 

Industrial: Q3 Posts More Record Demand

Pandemic-fueled consumer spending drove up third-quarter demand for warehouse and distribution facilities that eclipsed previous records. And despite a nationwide surge in new construction, some metros can barely accommodate the pace of tenant expansion. Additionally, year-over-year rent growth is at a record 6.7 percent for the industrial property sector as a whole and 7.9 percent for logistics facilities.

The national vacancy rate fell at the fastest pace ever in the third quarter, settling at a record low 4.6 percent. Net absorption in the third quarter totaled 157.9 million square feet, a 17.2 percent increase over second quarter’s record-setting net growth of 134.7 million square feet. Net absorption through the first three quarters of 2021 totaled 366.5 million square feet. The previous record was 278.7 million square feet set in 2016. It’s also notable that net absorption already has exceeded the record 342.9 million square feet of new deliveries expected this year. READ MORE >

Office: Positive Demand Returns

The nation’s office market posted positive net absorption in the third quarter. It was the first quarter of growth since the pandemic hit. The tenant expansion came despite spiking COVID Delta infections that began in early July, renewing employer caution over office re-opening plans.

Net absorption totaled 11,792,287 square feet in the third quarter. But over the previous 18 months negative absorption totaled 131 million square feet, which accounts for 1.6 percent of the 8.2-billion-square feet inventory. It also is equal to two years of growth in a strong pre-COVID economy, during which the five-year absorption average was 65.5 million square feet per year. READ MORE >

Retail Demand Stages a Comeback

Retail real estate is staging a notable comeback in 2021, bolstered by enormous government subsidies to consumers, who largely are getting vaccinated. While there was a sharp increase in e-commerce in 2020, this year has been brick-and-mortar’s turn. Merchants expanded their real estate footprints again in the third quarter by 28.6 million square feet. This follows 20.2 million square feet of positive net absorption in the second quarter and 4.5 million square feet in the first, and brings overall year-to-date growth to 53.3 million square feet, 52 percent more than for all of 2019.

In addition to the injection of more than a trillion dollars into consumers’ wallets, reopening of the economy and easing restrictions on operations also helped slow the pace of store closure announcements and bankruptcies, which are on pace to impact the least amount of space since 2016.

Many retailers are expanding into new locations with grocery, discount, home décor and beauty sectors as the most active. At the same time, the average-sized footprint continues to lessen as several merchants, such as Target, Macy’s and Burlington, are focusing on operating leaner, smaller formatted stores. Retailers’ expansion plans continue to focus on faster-growing metros in the South and West, where absorption and leasing activity is greatest. READ MORE >

Multifamily: Growth Pressures Hit Renters

Apartment demand is in overdrive and rents are soaring. Third-quarter absorption totaled 203,994 units, bringing the year-to-date total to 621,680. That’s a 67 percent increase over last year’s absorption record of 372,904 apartments. The vacancy rate for 17.8 million apartments is at an all-time low 4.6 percent.

At the end of the third quarter, monthly rents were up an average 10.4 percent this year to $1,524 per unit or $1.71 per square feet. Rents were highest in San Francisco, averaging $2,964, up 10 percent this year. Of the top 80 U.S. metros, 17 posted annual growth rates over 15 percent. Austin, Jacksonville, Las Vegas, Orlando, Phoenix, Raleigh and Tampa averaged asking rent hikes of more than 20 percent.

Third-quarter net absorption totaled 142,274 units out of 4.8 million Class A apartments and 193,458 apartments out of 7.2 million Class B units. Dallas/Ft. Worth was No. 1 in net absorption with 46,145 units in the last 12 months.

With demand and rent growth indicators surging and values back on the rise, investors have regained confidence in the sector and sales volume has returned to more normal levels in the last few quarters. Investors are increasingly drawn to the Sunbelt markets. Third-quarter sales volume in metros like Dallas/Ft. Worth, Atlanta and Phoenix was well ahead of trading levels early this year. READ MORE >

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There has been much anecdotal discussion lately of Californians fleeing high-cost, high-density, high-traffic living for greener pastures, especially as COVID-19 made working from home a possibility for California’s high-tech workforce. This trend is not just a rumor for the residents of Idaho. Idaho is the second-fastest growing state in the nation[1], and Californians make up nearly 46 percent[2] of a new population influx that the state has experienced over the past five years.

What is driving so many people from the Golden State to the Gem State, and what does this mean for commercial real estate prospects in Idaho? REBusiness sat down with Matt Mahoney, managing principal, Lee & Associates Idaho, to answer those questions.

Remote Work and Booming Growth

COVID-19-related remote work is driving people to areas where there is a high quality of life, natural beauty and an abundance of outdoor activities. Matt Mahoney notes that because Idaho’s population is lower to start with, the state can easily find itself at the top of lists of fast-growing states. Still, there is real growth in Idaho’s population (increasing 17.4 percent since the 2010 census[3]).

However, Mahoney believes there is a lag between the exploding population and the commercial real estate world, though this delay is changing even now. “Because it is very public data that Idaho is one of the fast-growing states in the union, capital is now following. It has flooded into this area from all parts of the country, and it is chasing a yield. Historically, our yields have been a little higher than those of nearby states along the Pacific Ocean.” READ MORE >

The Business of Idaho

Mahoney notes several attractants: a balanced state budget, moderate taxes and fiscally conservative practices (especially when compared with California) that make Idaho (and Boise in particular) increasingly popular with a variety of companies.

“It’s really good to see manufacturing relocating to this area, because historically we haven’t had lot of manufacturing jobs here — other than technology-based manufacturing. In that technology sense, Idaho has HP’s printer division and Micron (which has their corporate headquarters here). But traditional machine-based manufacturing (including auto manufacturing) historically has not been in this area. We are seeing some of those more blue-collar jobs relocate from other cities. That primarily has to do with our lower cost of utilities and lower wages than in some surrounding states.” READ MORE >

Breakdown by Asset Type

Multifamily has very little vacancy and there’s very little turnover in that area. Low unemployment means that rent rates have been able to steadily rise.

Industrial markets in Idaho are very hot but underbuilt for the interest that they’ve been generating of late. New developers are entering and building industrial properties quickly and with good reason — the asset class has a vacancy level of less than three percent. The only slowdowns for industrial right now, according to Mahoney, are the need to obtain permits and the fact that the cost of construction continues to rise. READ MORE >

Where and How Long to Expect Growth

The Boise metro area (or the Treasure Valley) includes Ada, Boise, Canyon, Gem and Owyhee counties. The Treasure Valley houses the majority of the state’s population influx (especially from states like California, Oregon, Washington, Arizona and Texas), but the metro area is also drawing residents from within Idaho itself (especially Eastern and Northern parts of the state). And Boise area suburbs will continue to benefit from the infusion of people.

In the eastern part of the state, Idaho Falls is Idaho’s second largest city and boasts Idaho Laboratories. In the Northwest, Coeur d’Alene is attracting residents, but not necessarily new companies. READ MORE >

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A turbulent 2020 only made the office market stronger, and it’s taking the renewed
fortitude and versatility into a recovery of increasing opportunity.

CHICAGO — The office market weathered a pandemic-fueled revolution last year, but both owners and tenants responded with impressive adaptability and endurance. Those things bode quite well for the sector’s recovery, according to Tony Russo and Ryan Freed, respectively SVP and VP at Lee & Associates of Illinois. The two discussed the office market outlook to start the second quarter of 2021.

“A major positive was how quickly many companies were able to react to the pandemic and get people to work from home to keep productivity going,” Russo said. “I think that was fantastic on most fronts. We’ll see more and more companies bringing employees back into the office mid- to late second quarter and definitely by third quarter.”

Unlike the last downturn, many office owners and landlords were able to withstand late payments and rent relief provisions in 2020, Freed noted. That was despite the additional expenses required to retrofit properties with anti-viral tools and technology.

“Owners were not only having to provide additional relief on multiple fronts, they were also getting hit with higher taxes in some places, but they still were able to hold onto their buildings,” Freed said. “It was good to see the landlords stay strong and still provide all those anti-COVID protective measures at the same time.”

The two note that disruption also opens up new opportunities. Tenants right-sizing their spaces for the long-term means a big chance for owners and investors to bring office product up to date and add the fresh amenities that occupants desire. And low interest rates incentivize the trading and upgrading of office assets.

“These landlords and investors will have to figure out how to make everyone feel comfortable when they do come back into the workplace,” Russo said. “In addition to hybrid work models, more tenants are leaning towards more of the private office setup versus the open concept and hot-desking that we’ve seen in recent years.”

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