CREXi National Commercial Real Estate Trends Report | Q2 2020

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Amid the impact of COVID-19, investors, brokers, and professionals across the CRE industry are eyeing market trends to gauge the health of the sector. In this paper, we dive into the commercial real estate activity we’ve observed on Crexi’s platform over the course of Q2 2020 , comparing it to the previous quarter and year-over-year metrics.

With these data points and insights, we seek to shed light on the undercurrent of commercial real estate activity with an eye to where it’s headed next.
Metrics and Methodology

This article relies on data from Crexi’s internal marketplace. In particular, in order 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. By using these listing-based metrics, and changes therein, we are able to use seller expectations at the time of listing to approximate overall trends in valuation. While these data aggregations may largely reflect prevailing market conditions, it is important to note that variations can also be affected by changes in inventory, 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.

It’s difficult to understate the impact of current events on commercial real estate’s Q2 performance. Like all industries, CRE experienced a sudden economic disruption due to business lockdowns and safer-at-home mandates enacted nationwide to combat the spread of COVID-19.

COVID-19’s impact on the job market swept through Q2 and resulted in a record 20.8 million total jobs lost in April 2020. Office employment lost 2.7 million jobs in the same month, and much of the country’s remaining office labor force was required to shelter in place. In May and June, as states attempted to reopen, about a third of the total jobs lost in April recovered.



Corroborated in part by Crexi data, industry publications cite an early Q2 decline in prices, leasing rates, and occupancy rates across nearly every asset type as the pandemic cooled sentiment on both the acquisition and disposition sides.On Crexi, the observed effect has varied considerably by asset type, with some weathering the COVID storm better than others.

June’s overall CRE metrics, however, saw gradual recovery as states slowly reopened and eased both business operating
restrictions (allowing 25% occupancy or outdoor-seating only in restaurants, for example) and safer-at-home requirements.

While the growth has been slow-going and continued government assistance will affect velocity, many signs point to a promising outlook for CRE in the second half of 2020. There is plentiful equity capital on the sidelines, waiting for price discovery and trends to reveal themselves before being committed in earnest. Too, government aid has effectively warded off the worst-case scenarios for many businesses, providing them breathing room to reassess operative costs and build their own defenses as legislative appetite for aid has waned.
Seller Behavior Trends



On Crexi, the average asking price per square foot for new listings dropped by 2.27% from Q1 to Q2. This move reflects sellers’ adjustments to uncertain market conditions caused by the pandemic. However, early numbers in Q3 data show a rise of 2.12% from the previous quarter. The relatively small drop and rise from Q1 to the beginning of Q3 is another indicator that overall market activity, while momentarily paused, certainly wasn’t permanently impaired by current events and is building momentum towards recovery.

Average occupancy rates of new listings in Q2 rose only 0.22% from Q1’s average. This reflects little evidence of tenants breaking their leases, and at least suggests that many of the assets added to the market in Q2 had not yet had time to be affected by business closures. Continued slow growth into Q3 would suggest that the support granted by PPP and other small business protection programs on a state and federal level helped keep occupants’ heads afloat amid industry-dependent levels of COVID-related impact. Indeed, most businesses strove to maintain their rent payments, and those facing difficulties (namely retail and hospitality properties) took it upon themselves to negotiate with landlords on a case-by-case basis.

For sale listings added in Q2 saw a 0.42% decrease in average cap rates from the previous quarter. This fluctuation reflects the market’s adjustments to acquisition risk assessment, as COVID’s short- and long-term impact on property value became visible.
Buyer Behavior Trends

While we saw the overall amount of buyer activity drop 15% in April month over month, activity levels climbed back up by 9.7% in May and another 14.5% into June, By July, buyer activity on Crexi exceeded pre-COVID levels by 7% as prospective investors gained a clearer understanding of the pandemic’s impact. This rise also can be attributed to more professionals relying on CREtech tools more to conduct commercial real estate business in the absence of face-to-face conversations.

In April, we observed a drop in buyer activity across asset types, with loan notes as the only exception seeing a 26% jump in interest. However, activity on all property types quickly rebounded in May and continued rising, with land and industrial listings exceeding pre-COVID levels. In further signs of returning market confidence, loan note buyer interest activity declined 51% from May to June.

Landlord Trends

Overall, the average lease rate for new properties still saw an increase from Q1 to Q2, albeit a modest one of 0.4% to hit $1.14 per square foot per month. Within the quarter, the average rate increased the preceding monthseach month though the rates of growth increased and slowed in tandem with market movement.

May saw a 25.5% increase in the volume of for-lease properties compared to April. We also observed a 19% increase in the amount of available square footage per asset from Q1 to Q2.
Tenant Trends

We observed a 19% decrease in leasing activity per user from March to April: a drop that corresponds with tenants placing their occupancy plans on pause amid safer-at-home orders and waiting to see how the market unfolded. However, this activity trended upwards into May and June, hitting 25.3% higher than pre-COVID leasing activity levels in January. This indicates that tenants are very much still searching for commercial real estate and have resumed the hunt for the ideal leasing option, all the more facile thanks to online CRE listings.
Industrial

Despite COVID-induced market disruption, the industrial sector stood strong in Q2 with low national vacancy rates, positive absorption, and healthy rent rates. Per CBRE’s quarterly report, national quarterly absorption hit 19.2 million square feet, with most demand centered around warehouse and distribution spaces. Despite a small hiccup in April, Q2 events accelerated industrial’s already high-trending performance with a sharp increase in need for e-commerce facilities.




This high performance defied market projections that foresaw lower rents and negative absorption for the sector at the onset of the pandemic. We saw similar trends on Crexi’s platform in Q2, where industrial inventory and buyer/tenant activity mirrored that of the larger marketplace.

On Crexi, industrial properties added in Q2 increased 47% from the amount added in the previous quarter. Industrial properties also comprised 11.8% of total new listings added in Q2, up from them comprising 9.9% of new listings added in the previous quarter.

Average listing occupancies decreased by only 0.5% from March to April, and by June was back up to pre-COVID levels. The small decrease captures the high market demand for industrial properties and how the asset type has little trouble maintaining tenants. Too, industrial tenants have mostly been allowed to remain open amid stay-at-home orders, which also accounts for their fast recovery, particularly when compared to harder hit assets such as retail and the lodging sector.

Interest in industrial properties for lease comprised 23.2% of Q2 lease-related activity on Crexi’s site, up 21.4% compared to tenant interest in industrial on Crexi in the previous quarter. In Q2, industrial properties for lease rose above office properties to be the second-most searched asset type, behind only retail in terms of tenant interest. In Q2, industrial properties for lease rose above office properties to be the second-most searched asset type, behind only retail in terms of tenant interest.

Land

Land deals are historically lower in velocity, taking a long time to close. As such, land parcels are — by a wide margin — the most numerous property type on Crexi: approximately 26.5% of the marketplace inventory in Q2 was land.

Land saw a sharp decrease in average price per square foot in June at the same time it saw an increase in unpriced properties on Crexi , comprising 13.4% of all land listings added in June. It’s possible assets that would have had a higher price per square foot became increasingly listed as unpriced, driving the average listing price down. Too, this trend indicates land brokers increasing uncertainty


about pricing, allowing market demand to determine price particularly on higher value assets.

Unlike most other property types on Crexi, land quickly rebounded in terms of buyer interest from the onset of pandemic — industrial was the only other property type with a similar recovery speed. Crexi visitors remained interested in land throughout the quarter, and buyers activity increased for land parcels by 12.1% from Q1.



Land properties for lease proved resilient compared to other asset types facing the pandemic. New land lease listings saw only a small average asking rate decrease of 3.43% in April, followed by a sharp 21.76% increase in May and another rise of 23.27% in June. At the same time, larger land parcels were added to Crexi in May and June: the average square footage nearly doubled over the period.

Prospective tenants showed an increasing interest in land in Q2, up 18.6% from the previous quarter.
Retail

Retail was among the most impacted by COVID-related business lockdowns and shelter-in-place mandates. Most retailers were ordered to lockdown early in the quarter, while economic concern caused consumers, focused on saving money amid heavy job losses, to drop retail spending by 8.1%.

However, despite the decline in sales and consumer sentiment, retail fundamentals remained relatively stable. The Paycheck Protection Program and SBA loans funded by the CARES Act kept many small businesses afloat during closures and allowed them room to pivot to leaner, alternative operation strategies. By June, we saw retail businesses nationwide gradually reopen with limited occupancy levels.

Not all retail types were affected equally in Q2. For example, groceries stores and other essential businesses generally performed better, as did retailers who could adapt to online ordering and curb-side pickups.

Recovery in the sector is dependent upon improved public health outlooks and economic conditions, though the speed of recovery will be impacted by how much longer COVID-19 lingers.


Retail assets — on average — fetch the highest average price per square foot on Crexi’s sales marketplace, and this didn’t change much over the course of Q2. Also, retail assets accounted for 21% of the listings added in Q2, a slight increase from total inventory of retail listings added in Q1.

Retail assets, too, were among the most viewed on Crexi in Q2, with buyer activity twice as high as the next most popular asset, multifamily.

Interestingly, the average rate per square foot for leased retail assets increased every month of Q2, without too much variation in the amount of available square footage.

Retail activity accounted for 51% of tenant behavior on Crexi’s leasing marketplace and saw a 3% decrease in overall retail interest from Q1. Month over month, retail activity took a dip in April, before climbing back to the same levels the asset type saw in February, pre-COVID.

In June, retail interest exceeded January’s all-time year high, indicating that many tenants are still active on the market either looking for opportunities otherwise unavailable during COVID or ways to expand their footprint with additional properties.

Office

At the start of Q2, future space requirements were indeterminable as tenants and buyers alike took a wait-and-see approach , tightening belts and staying ready to seize opportunity when outlooks shifted. However, there’s a potential growth in the sector for higher square footage listings and satellite offices as businesses seek to improve janitorial processes and accommodate a spread-out workforce.

On Crexi, we saw such behavior in the market as well as plenty of healthy user activity surrounding office demand — an indication that market moves are still very much occurring .

Crexi observed a 21.5% increase in the total amount of office properties added to the marketplace in Q2 from the previous quarter.

This surge in inventory occurred simultaneously with a slight decrease in average asking price per square foot, which dropped 3.97% in Q2. However, the drop in price was also affected by a 3.6% increase in the amount of unpriced office listings on the platform. As we indicated with land assets above, it’s possible that office properties that would have otherwise had a higher price tag became increasingly listed as unpriced, driving the average down.

Buyer interest in office properties saw a noticeable decline in early Q2, dropping by 26% relative to January’s interest levels. However, interest in the property slowly climbed in the following months as clarity about businesses office needs became more apparent. Buyer activity rose by 7% in May and rose again by 18% headed into June, indicating a promising trajectory for the asset type.

The total volume of office for lease spaces increased significantly in Q2, rising by 24.2% from Q1 new listings. Too, the average amount of rentable square footage, which decreased by 13% from Q1 to Q2. The increase in smaller spaces aligns with a (We’re seeing) rising demand from office tenants moving away from larger, metropolitan facilities towards smaller, suburban properties meant to serve as satellite spaces.

Tenants seeking office properties accounted for 36.26% of total leasing activity on Crexi’s marketplace in Q2, down only by 0.5% from the previous quarter’s activity levels. This indicates that businesses are reviewing and revising their office occupancy needs and are still transacting in the sector in preparation for their return to work. Too, tenants on Crexi requested floor plans 41.9% more often in Q2 in search of appropriate square footage to accommodate janitorial and health requirements post-COVID.

Multifamily

Multifamily experienced its share of impact in Q2, particularly in larger metropolitan MSAs as tenants grappled with on-time rent payments amid job losses. However, the sector held relatively steady overall, thanks to protections provided by the CARES Act’s stimulus checks and federal unemployment benefits coupled with state and local moratoriums on rent and evictions. As such, multifamily remained as one of the strongest performing assets in commercial real estate in Q2.


Average occupancy rates on Crexi lowered only by 2.18% in Q2, possibly aligned with the period’s increase in home buying and low interest rates. Too, this decrease occurs alongside a trend in multifamily residents moving towards suburban centers to leave the close quarters of metropolitan cities.

While interest in multifamily listings decreased by a sharp 15.5% from March to April, the sector saw interest jump 26.1% in May and June. By June, buyer activity around multifamily properties for sale hit 92% of January levels, showing promising growth for the sector as the market moved past its initial COVID-related concerns, shielded by government relief packages provided to both tenants and landlords.

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 changes in inventory, 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.
References

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