The ongoing COVID-19 pandemic has reshaped entire industries, and the commercial real estate industry is certainly no exception. Indeed, as many transactions paused in April, CRE buyers and sellers watched and waited to see how events would unfold in the wake of safer-at-home orders.
From March into April, we observed market transaction volume fall sharply by 42%. However, it’s not all gloom and doom: in June, as businesses began reopening and regions adjusted activities to accommodate for safe practices, buying and selling activity steadily resumed. As we’ve rolled into July and Q3, certain property types prove their resilience to a COVID-impacted economy and display increased levels of transaction volume.
However, transaction volume only tells part of the story. How long a property stays on the market — or how fast a deal closes — also strongly indicates the sector’s health. Therefore, we dove into Crexi’s marketplace data to take a closer look at how long each property type stays on the market. With this data in hand, we gain a clearer understanding of Q2’s completion and form projections as we charge ahead into Q3.
How long commercial real estate properties stay on the market
The historical trends we see in the days on market data gives us a good idea of where the market has been and where it’s heading.
Overall, it shouldn’t be too surprising that Q4 2019 saw a significant dip in days on the market across all property types preceding the onset of COVID (see Figure 1 below). In 2019, Q4 inventory was still moving at the same rate or faster than previous quarters. This dip corresponds to the robust, upward trending market activity of buyers and sellers rushing to finalize transactions by the end of the fiscal year.
As the COVID-19 pandemic settled in for March, we saw a significant uptick in average days on the market, with a 15-20% increase across all property types. Interestingly, however, we observed a divergence across asset classes as we moved through Q2 2020. Office properties for sale spent a much longer time on the market, whereas multifamily, industrial, and hospitality listings started rebounding from Q1.
All eyes on multifamily properties
It’s no secret that multifamily assets have been a hot commodity in many secondary and tertiary markets in the United States. We can attribute multifamily’s strength to continued population growth and rising rents in urban areas.
Since Q1 2019, multifamily properties have had the fastest deal closes of all major property types. The asset class saw a median of 78 days on the market, meaning half of Crexi’s listed multifamily properties spent less than 78 days on the market (see Figure 2 below). Furthermore, the top 25% of multifamily listings closed in 32 days or less. That said, more recent data paints a slightly different picture.
In Q2 2020, the median days on the market grew to 90 days for a multifamily listing, an increase of 12 days. This increase is not negligible, and it could be a trend to keep an eye on in Q3. As populations move away from urban centers to suburban regions, investors may consider in which markets the most fruitful multifamily investments may live.
The future of office properties
Office inventory lies on the other end of the spectrum. The sector has understandably been impacted by the onset of COVID for a myriad of reasons. First, a look at the data shows that in Q2 2020, office properties spent a median of 168 days on the market, up two weeks from 152 days in the previous quarter (figure 1).
Investors are taking longer to pull the trigger on office spaces given that many companies have gone remote. Additionally, prominent tech companies have publicly indicated that they’ll delay their return to the office until mid-2021. However, the sector is proving resilient as organizations sticking to offices are occupying more space to reinforce social distancing and improved janitorial practices.
While it is still too early to draw any long term conclusions about the future of office work, it is now clear COVID has disrupted the asset type. The rise of remote work may pose an existential threat to office properties across the country. However, the outlook is far from bleak. Medical offices by far have served as the vanguard for the asset class, particularly as public interest in health and wellness surges. And as populations migrate towards more suburban markets, we may see a rise in co-working and smaller, decentralized office units.