Expectations of Strong Post-COVID Recovery Bolster Competition for Commercial Real Estate Assets
by John Chang
PRICE DISCOVERY REMAINS CHALLENGING.
COMPETITIVE BIDDING SPURS CAP RATE COMPRESSION. Private investors have been a driving force behind commercial property sales since the onset of the health cri- sis, representing over half of commer- cial real estate sales dollar volume during the periods of peak uncer- tainty. Buyers have most aggressively focused on assets that weathered the pandemic best, including industrial, multifamily and self-storage prop- erties. Investors have also targeted property types expected to make a quick post-crisis recovery, such as hotels as well as certain types of retail and seniors housing. While some discounting has occurred in unique situations, valuations of most asset types have largely held as strong buyer interest has aligned with limited for-sale inventory. INDUSTRIAL INVESTORS ANTICIPATE ROBUST OUTLOOK. The alignment of steady e-com- merce growth, increased warehous-
ing of safety stock and the prospects of reviving imports and exports have amplified industrial investor opti - mism. Although cap rates range dramatically depending on the mar- ket, property vintage and numerous other factors, they have been favored with downward pressure predating the pandemic. Over the last year, this trend has gained momentum, lifting prices and reducing yields. Infill locations remain a top target for private investors while institution- al funds have favored larger assets with quality leases in place in port and intermodal hub metros. MULTIFAMILY PRICING SURPASSES PRE-PANDEMIC LEVELS. In numerous markets, well-per- forming apartment properties have achieved pricing above pre-pandem- ic levels. Though some submarkets in some metros continue to contend with weakened fundamentals that are suppressing values, optimistic investors in many cases are under- writing a strong recovery in 2021.
Multiple factors point to an econ- omy that is firmly in recovery as a critical mass of the U.S. popula- tion becomes vaccinated. Stimulus checks have bolstered personal savings, consumption has surged to record levels and reviving air travel suggests that both business and leisure travelers are back on the move. Many expect these economic tailwinds to boost commercial real estate fundamentals, inciting recov- ery speculation and driving buy- er activity. By the same token, the recovery has thus far been uneven, with some cities, states and property types jumping ahead of others, gen- erating a broad range of valuation trends. Many investors remain in a holding pattern, awaiting additional clarity before they sell, restraining the flow of marketable inventory. This has exacerbated the expecta- tion gap between buyers and sellers in many markets.
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