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April 05, 2021 - Blog Article
Commercial Real Estate Submarket Report Rent Gains in 2021

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It has been more than a year ago since the outbreak of the coronavirus, and until now, no one has utilized the rent asking metric to determine demand. Now the guessing game is over, according to CoStar Analystics team. They demonstrated recently that if we compare the past asking rents to the present asking rents, which are reported quarterly by property owners, it reveals the future demand for each commercial real estate property types.

The basis of their reasoning on why this metric works is due to owner confidence. If owners are pricing their rents at certain levels revealing a gain in rent, it is because they have direct industry insight that their asset will be in demand in the upcoming quarters, or in the case of hotels, in the near-term as hotel assets price for immediate demand expected. Lets review the conclusions by property type.

Industrial CRE Owners Are Reporting the Highest Rent Gains

Unsurprisingly, landlords of industrial CRE are the most bullish out of all the property types. Almost all industrial landlords posted year-over-year rent gains, and the rents did not fall off during the pandemic.

Ecommerce tenants and sales of durable goods have driven the most demand for industrial landlords. Tenants like Amazon continues to need places to store their consumer goods, due to online shopping.

Retail, Apartment, and Housing Sectors All Show Signs of Resilience

The retail CRE market suffered a huge blow in 2020, but it has been more resilient than others, with 60% of its submarkets reporting rent gains over the past year.

With more vaccinations, more people will slowly return to brick-and-mortar stores to feed their craving for good old shopping. Many businesses have closed permanently, but retail landlords and CRE investors are confident in the sector’s imminent rebound.

The same goes for the apartment submarket. Rents from late 2019 through midyear 2020 showed an initial hit; however, over the past quarters the apartment submarket began showing signs of stabilizing, which is quite promising.

Lastly, both single-family and multifamily properties are rising in demand. Two main contributors to their demand are low interest rates and work-from-home arrangements.

The Hospitality and Office Space Sectors Remain Weak

To say that the hospitality industry has taken a huge hit due to the pandemic would be an understatement. With closed borders worldwide and all the other travel restrictions, most hotel rooms were sitting empty, causing the room prices to bottom out.

Only 3% of hospitality submarkets have seen a rise in their average daily rates (ADRs) in the past year.

However, the hospitality industry is bound to recover quickly, as soon as people can travel safely again. Hotel room prices have already started increasing, thanks to vaccinations that boost people’s confidence and drive the pent-up demand for travel.

But will the office space sector rebound as quickly? 

The demand for office space remains low, with the majority of people still working from home. Many companies have even adopted permanent WFH (Work from Home) policies.

The vacancies are rising, and the rents keep shrinking, so property owners and many CRE investors are not very confident in this sector.

However, it’s important to note that not everyone will keep working remotely once the pandemic is over. Many people want to return to the office. We might just see a huge demand for office space in the near future, so do not count this sector out.

Summary

As commercial real estate owners price in the full effects of the global pandemic, tracking rent gains by property types reveals the confidence in that sector.

Despite government restrictions, working at the office mandates, decrease in travel, and temporary closures of shopping malls, most CRE submarkets have found a way to remain strong. Their reports on rent gains are sure to motivate many CRE investors to invest with more confidence.