with a positive growth outlook. While yields have been contract- ing, the margin relative to alterna- tive, low-risk investment vehicles remains wide as interest rates are still historically low. As the econo- my reopens, commercial real estate demand profiles are strengthening, and that anticipated momentum is carrying commercial real estate prices upward in most markets and property types.

Large primary markets have been set back the most with a 3.6 percent rent decline over last year, but rates in secondary and tertiary markets grew by 1.6 percent. The perfor- mance differential reflects migration trends driven both by the pandemic as well as the aging of the millennial generation. Half of millennials are 30 years of age or older, common family formation years, spurring demand for larger, more affordable living spaces outside the urban core. Workforce housing will likely enjoy the most robust housing demand, but as workplaces reopen Class A properties will also see a demand recovery. The collage of positive fore- casts lifted investor optimism, spur- ring acquisition demand, but current trends have also persuaded some prospective sellers to hold onto assets longer. Strong buyer inter- est has aligned with hesitant seller activity to bolster price appreciation and cap rate compression, pushing the national average cap rate below the low-5 percent range. RETAIL SECTOR FACES WIDE PRICING VARIANCE. Investor demand for single-tenant properties that sustained perfor- mance through the pandemic such as discount stores, drugstores and quick service drive-thru restaurants remains high. This is preserving pricing momentum and cap rate compression. Pricing of course varies depending on the length of lease, the location of the property, and numerous other factors, but the overall average cap rate has dipped to the low-6 percent range. Gro- cery-anchored shopping centers in growing submarkets are also being pursued by investors, driving cap rates for these assets to the 6 per- cent to 8 percent range depending

on tenant profile, payment history and location. Buyers remain cautious regarding multi- and single-tenant spaces dependent on weekday foot traffic or close social interactions. A revival is beginning to mount for these types of properties, however, as states reopen their economies. For underperforming properties, a bid-ask imbalance is inhibiting sales. UNCERTAINTY RESTRAINS OFFICE INVESTOR ACTIVITY. Office buildings continue to face an unclear demand outlook even as more companies take steps to curb remote work. Assets located in walkable first-tier suburban set - tings with a strong lease profile have attracted the most investor attention, and pricing in growth markets can reach above pre-pandemic levels. Urban office towers still face sev - eral hurdles in bringing all workers back in, such as trepidation toward public transit or crowded elevators. Because of these impediments, cap rates across the office sector have remained stable on average, in the low-7 percent range. Medical offices, in contrast, have more clarity on long-term demand, sustaining inves- tor interest. Cap rates for recent trades of these assets have nudged lower, to just below their historical average of 7 percent. COMMERCIAL REAL ESTATE CAP RATES OFFER COMPELLING MARGINS. Many investors anticipated the health crisis to precede a wave of price discounting, but that out- come has become less common as the country’s health situation has improved. The limited number of marketed assets has instead sup- ported price appreciation and cap rate compression in regions favored

John Chang serves as the National Director of Research Services for Marcus

& Millichap. He is responsible for the production of the firm’s vast array of commercial real estate research publications, tools and services. Under his leadership, Marcus & Millichap has become a leading source of market analysis, insight and forecasting, and the firm’s research is regularly quoted throughout the industry and in mainstream business media. John oversees a team of dedicated real estate research professionals who produce the firm’s more than 1,000 annual market research publications and conference presentations. These detailed reports, analyses and presentations integrate economic and financial market trends with insights on all major commercial property types including: Hotels, Industrial, Manufactured Housing, Multifamily, Office, Medical Office, Retail Multi- Tenant, Retail Single-Tenant, Self-Storage and Seniors Housing. John is a seasoned industry analyst who has been quoted in numerous publications and is an active member of the NMHC Research Foundation Advisory Committee, the ICSC North American Research Task Force and the NAIOP Research Foundation. He regularly presents at a wide range of conferences and events hosted by industry- leading organizations such as the NMHC, NAIOP, ULI, CCIM, ICSC, SSA and numerous others. John joined Marcus & Millichap in April 1997 as a Research Manager in the Seattle office. After holding executive marketing and e-business positions with premier residential real estate firms in the Pacific Northwest, he rejoined Marcus & Millichap in November 2007 as the head of its Research Services division. John was elected as Vice President in 2010, advanced to First Vice President in 2013 and promoted to Senior Vice President in 2018.


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