Crexi National Commercial Real Estate Trends Report | Q3 2020

Oct 30, 2020

Following a tumultuous second quarter, Q3 commercial real estate activity has shown promising recovery and rebounding activity across asset classes. Amid these market changes, investors, brokers, and CRE professionals alike are eyeing trends to gauge the ongoing health of the sector and target the most promising investments. In this quarterly whitepaper, we dive into the buying and leasing activity we’ve collected on Crexi’s platform over the course of Q3 2020, comparing it to the previous quarter and year-over-year data.

With these unique metrics and insights, we seek to shed light on the undercurrents of commercial real estate activity with an eye towards the future of the sector.

Metrics and Methodology

This article relies on data from Crexi’s internal marketplace. In particular, to ascertain timely and representative trends in seller sentiment, this article focuses on trends in offering metrics, such as average asking price per square foot, cap rate, and monthly rents, in addition to listed occupancy, tenancy, and square footage. Using these listing-based metrics and changes therein, we can use seller expectations at the time of listing to approximate overall valuation trends.

While these data aggregations may broadly reflect prevailing market conditions, it is essential to note that variations can also be affected by inventory changes, asset size, etc. We pair these data points with internal data from Crexi buyers on search trends and acquisition-related actions performed on Crexi to provide a holistic understanding of where both sides of commercial real estate are headed.

What Happened In Q3

Compared to the previous quarter’s tumult, uncertainty, and economic contraction, Q3 2020’s modest recovery signs represent a welcome relief. Per JLL’s Economic Outlook report, data from summer 2020 indicate a record-breaking rebound as businesses slowly reopened, and consumers gently resumed activity, jumpstarting the economy from its Q2 freeze.

While many larger metros still face continued closures , secondary and tertiary markets have relaxed stay-at-home orders at various levels. Modifications to business operations such as flexible returns to the office and outdoor dining allowed the otherwise hard-hit office and retail sectors to continue activity. At the same time, investors and landlords began to understand how to handle assets amid COVID-19.

However, while CRE and economic activity picked up in the third quarter, it wasn’t without the undercurrents of larger uncertainty. The promise and final trial phases of a vaccine have assuaged some concerns, but cooler weather in winter brings cold and flu season and frustrates the possibility of outdoor dining and shopping. And while presidential elections always cause market uncertainty, this iteration brings with it concerns of stalled stimulus measures, particularly as the CARES Act and other government-provided financial reserves ran dry early in Q3.

The growth the US enjoyed in the third quarter may hold a false promise for Q4 growth . Nevertheless, commercial real estate investors and tenants are still seeking properties, and landlords continue to sell. Per an August Sentiment Survey from SIOR, 45.2% of CRE transactions were proceeding on schedule, compared to only 26.1% at the onset of the pandemic. Deals are still getting done, led in no small part by risk-averse and dry-powder-rich investors seeking to pursue opportunities equipped with a COVID-discount. There’s plentiful capital to deploy, and many investors want to take

advantage of historically low-interest rates and the chance to enter more attractive markets.

Seller Behavior Trends

On Crexi, we observed the average asking price per square foot for new listings rise by 3.18% with a simultaneous 19 basis point contraction in cap rates. This increase in sellers’ value estimates indicates a returning confidence in the commercial real estate market six months into the pandemic.

Early Q4 numbers hint at a continuation of this trend and as the economic landscape post-COVID becomes more predictable, sector confidence and CRE transaction volume are slowly returning to pre-pandemic levels.

We also see this returning confidence in the number of new listings added to Crexi in Q3. Compared to Q2 amounts, the platform experienced a 10% increase in the total new property listings for sale. Where sellers were holding on to their assets and took a “wait-and-see” approach earlier in the pandemic, more entities are now choosing to list their assets proactively. These boosted numbers of assets in Q3 point to sellers looking to finalize transactions before the end of 2020’s fiscal year and before any changes following November’s election.

Too, brokers and sellers across the commercial real estate spectrum are continuing to list their assets unpriced at high numbers, as seen in Q2. Throughout Q3, the total amount of unpriced properties rose from 11.24% in July to 15.01% in September. This amount of new, unpriced listings was just shy of its 16.52% May high in Q2 but indicates a returning, creeping uncertainty in market values. More and more, property owners are selecting to strategically lead interested demand further along the sale process before discussing pricing.

*These numbers may periodically change as the Crexi team continually updates our methodology and improves listing categorization, so as to better match investors’ search preferences and more accurately reflect industry trends.

Buyer Behavior Trends

An uptick in buyer activity also points to a promising recovery in the CRE transaction space. Total buyer activity increased steadily every month since April of this year, with an overall increase of 29.9% from Q2 to Q3. We also observed buyers on Crexi become more engaged in their searches: buy actions per individual users were up 4.05% from the previous quarter, pointing to increased intent towards purchase compared to earlier in the pandemic. This trend is further supported by the number of leads buyers received per listing in Q3: the number of buyer leads jumped over 17% from Q2 values.

Across every property type, we observed a range of growth in buy actions from 13% for hospitality assets to a 34% jump in the industrial sector. As a further indicator of positive market sentiment, interest in loan and note sales decreased 61% from Q2 to Q3.

Landlord Trends

On the leasing side of our platform, we observed a 35% increase in new leasing spaces added in Q3. This boost was largely supported by new office and retail listings coming online, with total amounts increasing by 23.5% and 37.5%. The former’s increase aligns with a national surge in subleased office space, which exceeded dotcom bubble levels in the third quarter. On the other hand, retail is likely seeing landlords appealing to opportunistic business owners and investors looking to expand their footprint with additional properties or take advantage of otherwise unavailable opportunities in high-performing markets or high-trafficked locations.

Compared to Q2, Q3 leasing asking rates remained relatively flat on the aggregate, with only a 0.57% increase. July rates saw a slight reduction of 2.04%, likely bracing for impact as the funds from PPP and other government stimulus measures ran dry. However, both August and September saw rates recover 0.92% and 3.84%, respectively, maintaining average asking rents’ relative stability.

Tenant Trends

Tenants were highly active in Q3 compared to the previous quarter, indicating a full-steam-ahead intention to seize on well-positioned commercial real estate opportunities in profitable markets. Following a small blip from March to April, as tenants placed their occupancy plans on hold, June’s tenant activity surpassed pre-COVID activity in January 2020. Q3 galloped on the same growth trajectory, with a 109% jump in total leasing activity from Q2 levels. And while this is partially due to an increase in total inventory, the number of lease actions per property — a measure of tenant engagement — increased over 17% from Q2.

Industrial

While industrial has proven a recession-resilient asset class with transaction volume exceeding pre-COVID levels in national markets, it has started to show signs of mean reversion .

Warehouses equipped to fulfill e-commerce sales are in high demand, but less so other industrial product types, particularly those dealing with disruptions to supply chains and overall global trade and manufacturing reduction. Market saturation may have caught up with the asset class, accounting for the observed leveling off in valuations. However, a strong September performance points to positive signs heading into Q4, and correction may have already

occurred in the market.

Overall asking price per square foot for industrial properties rose 5.42% in Q3, driven by strong performance in September and led by a 165.7% surge in new warehouse listings added to Crexi’s platform. Following a period of growth in Q2, we saw a slowdown in July and a slight decline in August prices, pointing to a period of adjustment in the sector.

On Crexi, we saw an 8% increase in the total amount of industrial properties hitting the market in Q3, pointing to a decrease in overall sector availability. However, occupancy rates for industrial assets coming online in Q3 saw Oa slight contraction, dropping to an 84.78% average from Q2’s 90.61% and making the market ripe for tenants seeking industrial facilities. In the leasing market, industrial asking rent rates slightly decreased by 3.05% from the previous despite a 17% jump in the total amount of for rent industrial listings added in Q3. This mirrors the market oversaturation and correction described above, quarter, though it has not impacted tenant

interest in the sector: industrial was among the most popular property types on Crexi in Q3, with a 100.8% jump in lease actions from the previous quarter.

Land

Land properties remained one of the most numerous asset classes on Crexi in Q3, accounting for approximately 40% of the platform’s total listings. With this surge in new listings added to already available properties came a jump in these land parcels’ average size: Q3 square footage jumped 26.9% in size compared to the previous quarter. This disposal of larger land parcels suggests an interest in upcoming development.

Interestingly, land was uniquely one of the most unpriced assets in Q3, with nearly 17.5% of land assets listed without a price tag — the next highest was industrial at 15.38%. This indicates sellers’ strategic willingness to let market demand set prices on a given asset, potentially attracting more competitive offers in

high-demand regions.

Land parcels on Crexi experienced a surge in popularity early on in Q3 regarding buyer and tenant interest alike. Buyer activity increased 26% on land parcels, while tenants engaged with land assets 89% more than in Q2. In terms of closing, buyer offers on land deals increased 15% quarter over quarter.

Retail

While retail undoubtedly bore the brunt of disruption due to COVID-19’s impact on consumer behavior and retail availability, industry players are starting to creatively think about how to respond to these changes in the third quarter. Designer retailers such as Nordstrom and Macy’s are reducing their footprint to reach consumers outside of mall locations, while stores like Walmart and Amazon’s Whole Foods are repurposing their stores’ footprint to maximize omnichannel delivery and ecommerce fulfillment.

As such, we observed promising gains in the retail sector’s average price per square foot in Q3, despite a slower recovery than other asset classes. Prices rose at a steady 3.6% in the quarter after a 4.14% drop in the pandemic’s first quarter.

Overall, we observed a 27.1% increase in the amount of new retail listings added to Crexi

in Q3, though this amount is considerably down from the 98.6% surge in Q2. Quick service restaurants (QSR) in particular saw a wave of listings come online in the third quarter, increasing with a 148% jump in listings added compared to Q2. This is likely due to the subtype’s success compared to indoor, sit-down dining facilities, and the advantage of socially-distanced drive-thrus and pick-up options.

Despite a moderate drop of 5.54% in July, retail asking rates per month steadily increased in August and September, surpassing January highs by the end of the quarter.

Interestingly, retail property types attracted the highest number of leads and showed the greatest growth in each month of Q3. While all assets experienced higher lead totals, retail’s total leads jumped by 41.2% from the previous quarter. This radical jump points to an increased interest in the sector hardest hit by the pandemic, where opportunities are increasingly presenting themselves to discerning investors.

The buyer interest timeline also aligns with the upcoming holiday season, a peak period of retail success in normal times. While it’s unclear if shoppers will return in-person to stores with the availability and ease of e-commerce, retailer creativity in adapting to how and where buyers shop will be key in the sector’s success.

Office

Six months into the pandemic, office owners and tenants are still determining their balance of employees working from home, those requiring office space, where to maintain HQs, how much space is needed, and where precisely should those spaces be sited. While conditions are still changing, in response to broader public health concerns on a market-to-market basis, many office occupiers are starting to make decisions heading into H2 2020, following a “wait-and-see” evaluation period in Q2.

Additionally, growing concerns over losses of productivity and threats to collaboration as work-from-home continues will likely boost recovery in the sector.

Depending on the creation and implementation of a COVID vaccine, companies will likely adopt flexible working policies, with urban central offices serving as collaboration and meeting centers and satellite offices in secondary and tertiary markets to support remote workers.

On Crexi, office asking prices per square foot rose 5.2%, making modest recovery gains following COVID-related closures and a 5.52% price drop in the previous quarter.

Too, we observed a 31% increase in the number of office spaces coming online in Q3. This is likely due to companies and owners seeking to shed excess square footage amid prolonged work-from-home policies in urban metros. The trend corresponds with a 23% increase in the number of office listings for rent on Crexi, many of which are subleased spaces.

Demand for office space also experienced modest gains, indicating renewed interest in the sector following six months of the pandemic. Buy actions for

office properties rose by 25% quarter over quarter, while the total amount of leads engaging with office properties jumped by 42.35%.

Tenants seeking office space for lease showed even more engagement in the same period: lease actions rose by 94% quarter over quarter and accounted for 33.87% of all lease actions on Crexi in Q3.

Multifamily

Thanks to government-mandated restrictions on evictions, expanded unemployment benefits, and the Payroll Protection Program, multifamily has shone as one of commercial real estate’s top performers in 2020. Prices have seen moderate growth while vacancy rates nationwide have remained relatively unchanged. However, the market is starting to see an effective rent decline as those benefits expire and, pending additional government stimulus or unemployment decreases, the sector may potentially see vacancy rates rise later into the beginning of 2021.

Despite this, year over year differences in rent payment rates have remained stable. Thanks to the federal extension of foreclosure moratoriums by the CDC, many investors are less concerned about an approaching surge in foreclosures. However, per the National Multifamily Housing Council’s monthly reports, while the overall percentage of rent payments declined to 86.2% in September, October totals are already climbing back to Q2 levels.

As such, investor interest has remained strong in the multifamily sector, and the asset class is still by far one of the top performers amid COVID-19. On Crexi, multifamily’s average price per square foot jumped 14.74% overall in Q3, starting strong in July and slowing steadily towards September.

Multifamily experienced a 21% climb in total leads in the sector compared to the previous quarter, supporting its attraction as a recession-resilient asset. Too, offers submitted on multifamily assets jumped by just under 15% quarter-over-quarter, indicating increased buyer intent to close.

Disclaimer

The information in this article is based on Crexi’s internal marketplace data and additional external sources. Crexi internal marketplace data consists of aggregated property-level data points provided by brokers and validated internally by Crexi.

While these data aggregations may largely reflect prevailing market conditions, variations can also be affected by inventory changes, asset size, etc. Nothing contained on this website is intended to be construed as investing advice. Any reference to an investment’s past or potential performance should not be construed as a recommendation or guarantee towards a specific outcome.

Glossary

Occupancy: The percentage of occupied square feet in a building.

Absorption: A measurement of the net change of the supply of commercial space in a given real estate market over a specific period of time. Total absorption is new square footage leased by tenants minus vacated square footage vacated by tenants and made available on the CRE market.

Asking Price per Square Foot: The asking price per square foot of a building for sale.

Asking Rate per Square Foot: The landlord’s asking rent rate per square foot for a building or market.

Asset Type: Also called “Asset Class” or “Property Type,” one of four main categories in commercial real estate: retail, industrial, multifamily, and office. Also can refer to smaller categories including land, hospitality, etc.

Asking Cap Rate: Net Operating Income divided by the Asking Price.

Vacancy Rate: The rate of vacancy in the listed property.

Buyer Activity: Acquisition-related actions taken by users on Crexi sales property pages.

Buyer Searches: Internal site searches taken by users on Crexi sales or lease.

Lease Activity: Leasing related actions taken by users on Crexi lease property pages.