The commercial real estate world has been nothing but turbulent since the pandemic changed everything. From disrupting markets, to streamlining internal processes, and the rapid adoption of proptech, firms continue to respond to a faster-paced landscape. Read on to learn more about commercial real estate trends across financials, markets and technology that are leaving their mark on the industry as it exits the pandemic.
Commercial Real Estate Financial Trends
1. Commercial Sales Transactions Were Down 28% in Q1, But Passed Pre-Pandemic Levels in Q2
In March of 2020, the pandemic upended the commercial real estate world, disrupting everything from leasing activity to retail demand and beyond. The industry has come a long way since the onset of the pandemic, but its effects are still palpable. Vaccine availability, return-to-work plans and increasing levels of comfort within the public bolstered investor confidence, pushing industry transactions 17% above the pre-pandemic trend in Q2.
According to Real Capital Analytics, commercial real estate sales transactions were down by 28% as of Q1 in 2021. Somewhat surprisingly, hotels were the outlier, experiencing a 13% increase in transaction volume during this period. With the tourism and entertainment industries still pacing behind targets due to COVID-19 restrictions and concerns, this commercial real estate trend indicates that investors intended to purchase and convert these hotels to a different asset class, like industrial or multifamily.
2. Commercial Prices Increased by 19% in the Last Year as of September
Investment managers are not only transacting more frequently, but also with rising prices. According to Green Street’s Commercial Property Price Index, property prices were up by 19.6% year-over-year as of September. Self-storage and industrial saw the highest increase in price, at 47% and 39% respectively. Office and malls saw the lowest price boost, at 4% and 9% respectively. Overall, prices were up 8% from pre-pandemic pricing.
Based on CBRE’s U.S. Capital Markets Figures Q2 2021 report, commercial real estate cap rate trends show that cap rates have decreased across nearly all industries. Industrial saw the largest decline in cap rates, especially as the e-commerce industry booms.
3. With Leasing Activity Down, Trends Move Toward Shorter, Smaller Suburban Lease Agreements
The worst of the pandemic might be over, but companies and institutions are still treading carefully when it comes to long-term decisions like leasing. Leasing activity recorded in Q1 for Q2 was down by 2%, according to a survey of NAR commercial members.
In a world that increasingly favors hybrid work, these figures are further proof of a paradigm shift. Companies that once viewed office space as a necessity must now determine which model they’ll adopt moving forward, whether they need the same space, and other considerations. In the wake of this uncertainty, commercial real estate trends have shifted toward shorter leases, or those less than two years, providing companies with more flexibility when it comes to securing space. Leases also generally favored smaller spaces. Unlike central business districts, where this trend was most noticeable, suburban offices have proven to be a more reliable target.
4. Commercial Real Estate Firms Trend Toward Cutting Costs
The goal for any organization is to cut costs while boosting profits. As commercial real estate professionals continue to navigate an industry mired in pandemic-related complications, such as vacancies, fluctuating consumer demand and an uncertain future, cost reduction has become a priority initiative, according to Deloitte.
Even as office demand decreases in a hybrid work environment, operating costs have increased. Many building managers have implemented advanced health and safety systems, which have taken a toll on operating budgets. Some opportunistic investors have also taken on the challenge of preparing buildings for a post-COVID world.
As firms continue to find ways to cut costs, technology that streamlines processes, centralizes information and boosts efficiencies will remain a commercial real estate trend.
Commercial Real Estate Market & Asset Class Trends in 2021
5. Retail Continues to Evolve
E-commerce was rapidly growing prior to the pandemic, but months of quarantine only exacerbated this growth. In Q3 of 2020, e-commerce comprised 14.3% of all retail sales, according to the U.S. Department of Commerce Quarterly report. Among the commercial real estate trends resulting from these conditions is the declining importance of retail as an asset class. Small businesses suffered from a decline in foot traffic, but even JCPenney, Lord & Taylor and Brooks Brothers, once established retail giants, filed for bankruptcy.
While the prominence of retail might continue to decline, it won’t fade away entirely. Instead, the role of physical stores will change. Future-facing retail strategies prioritize an omnichannel approach to sales, engaging customers in-store, online, and via mobile. Physical stores will continue to play the ever-important role of acting as distribution centers, pick-up locations and showrooms, which will grow more sophisticated as augmented reality technologies help customers understand how products fit in their spaces. Customers may place orders online, but brick-and-mortar buildings will deliver an important experience that drives brand loyalty.
According to CBRE, there may be 20% less retail-dedicated real estate by 2025, as the asset class undergoes a transformation. High-quality retail investments may not stoke the same fear, but these transactions will call for a thorough, data-driven analysis to prove their mettle in a changing world..
6. Mall Declines in Popularity, With Repurposing on the Horizon
Like retail, malls also suffered a decline in foot traffic as e-commerce surges. This decline isn’t sudden, as malls suffered a decline in popularity even prior to the pandemic. Although investors might not be transacting with the intention of holding the mall, some developers are eyeing them for repurposing.
According to NAR’s 2021 Q1 survey, investors indicated intentions to repurpose vacant malls into a variety of other asset classes. 39% of respondents indicated that malls were being developed into mixed-use properties, which includes residential, retail and office. 25% indicated that they were suited well for industrial properties or fulfillment centers. As time goes by, this commercial real estate trend will likely become more prominent.
7. Industrial & Warehouse Properties Soar in Popularity & Occupancy
The e-commerce boom has set in motion many commercial real estate trends, most notably a strong boost in popularity for industrial properties like warehouses and final-mile fulfillment centers. Even as retail declines, distribution centers will remain integral for businesses of all sizes. That means building a network of distribution centers, spanning cities, highways, and even rural areas, is key to delivering on delivery time windows.
According to the NAR report, based on data from Real Capital Analytics, Atlanta saw the biggest increase in industrial real estate net absorption in Q1 of 2021. Inland Empire, Pennsylvania I-81/I-78, and Chicago also experienced large increases.
8. Multifamily Markets Have Shifted, and Are Shifting Back
Investors traditionally look at multifamily as a low-risk investment, given the constant need for affordable renting space, especially in cities. The urban exodus incited early on in the pandemic, however, tested this once-standard rule of thumb. Following this trend, the commercial real estate market turned to suburban markets. Exhausted by working in small spaces in crowded cities, people sought the comfort of larger units and outdoor areas.
While urban multifamily’s popularity declined early on in the pandemic, it’s now experiencing a resurgence in popularity. Companies are in the process of gradually returning to the office, driving some workers right back to central business districts. In their 2021 US real estate market outlook report for multifamily, CBRE projected 33% growth in investment volume throughout the rest of the year.
9. Life Sciences Booms in a World With New Priorities
The pandemic exposed the need to devote greater attention toward proactive medicine development, paving the way for life sciences to shine even brighter. According to JLL’s 2021 real estate life sciences lab outlook, the commercial real estate trend toward life sciences stems from a stronger desire to live long, healthy lives, as well as the movement toward personalized medicine borne from living organisms, called biologics.
Venture capital funding reflects this growing trend, too. In San Francisco, year-to-date VC funding as of Q2 2021 had reached $9.9 billion, poised to surpass the 2020 total of $14.6 billion. Boston, trailing shortly behind San Francisco, had already reached $9.5 billion as of Q2 2021, which is less than $1 billion behind its 2020 total of $10.2 billion.
10. Office Demand Rebounds, Propelled by Hybrid Models
Perhaps the most prominent and enduring commercial real estate trend that will come out of the pandemic is the transition to remote and hybrid workplaces. Nonetheless, the office market has rebounded, fueled by rising confidence and a gradual return to the office, largely in hybrid capacities. It’s clear that, while the role of offices may change, they will remain a fixture of the American economy.
In Q2 of 2021, gross leasing activity rose by 28.7%, according to JLL’s office market outlook report. This is also the first quarter in which market leasing exceeded 30 million square feet since the pandemic began. While the transaction has yet to close, Google announced its intentions to purchase a NYC office building for $2.1 billion, which would mark the largest CRE office transaction since the beginning of the pandemic. It’s clear that the increasingly popular hybrid office model will leave its mark on the industry, but the office market will likely continue to rebound as restrictions are gradually lifted and workers return to physical spaces.
11. Ghost Kitchens Take a Stronger Hold on Restaurants/Retail
In the early days of the pandemic, restaurants had no choice but to shutter their doors amidst restrictions, generating revenue mainly through delivery and pick-up. Even once restrictions were lifted, many still grappled with seating restrictions, low consumer confidence and other variables that restricted cash flow. All the while, they paid high overhead costs like rent, payroll and more.
In the wake of these high overhead costs came ghost kitchens, or facilities that cook food onsite and exclusively deliver it. Without the costs of building, decorating and maintaining a dining room, or paying servers, ghost kitchens enjoy a leaner operating budget than traditional restaurants. This commercial real estate trend gives property managers more options when it comes to leasing, as the space required to operate a ghost kitchen is dramatically smaller than a restaurant.
Commercial Real Estate Technology (Proptech) Trends
12. Technology & Software Remain a Top Priority for Organizations of All Sizes, Across Verticals
When it comes to technology adoption, commercial real estate is pacing behind adjacent capital markets, like the equity market. The past few years have given rise to the ongoing proptech revolution, during which firms gradually took on technologies that simplified outdated processes. Many firms saw this as an opportunity to consolidate functionality that previously lived within disparate systems. For example, Dealpath, the leading deal management software platform for investment management firms, centralizes deal data, workflows, communications, and files, fueling collaboration, productivity and transparency. Other new technologies help property managers find ways to optimize the tenant experience using the IoT (internet of things).
The rapid and forced transition to remote work in March of 2020 only added fuel to the fire. Facing the new challenge of collaborating from remote environments, without the option for in-person meetings or casual conversations, commercial real estate firms recognized the immediate need to move to the cloud.
According to a Deloitte survey, 56% of respondents indicated that the pandemic exposed their firm’s shortcomings when it comes to digital capabilities. The pandemic catalyzed this ongoing digitization, and having recognized the value of modern technology, achieving full tech enablement has become a priority. 53% of respondents have a roadmap of where they’d like technology to take them, and 32% are restructuring internal processes based on technology and tools. 58% of surveyed REITs and 45% of developers said that they wanted to partner with technology companies, showing that firms are responsive to the evolving landscape.
13. Investors Will Continue to Make Faster Decisions
Resulting from the aforementioned proptech revolution is an ongoing paradigm shift in which investors have the deal and data visibility required to make faster, more precise decisions. Streamlined access to standardized data allows investors to glean strategic insights at a significantly faster pace than would be possible with more traditional methods, like Excel spreadsheets.
As larger institutional firms like Blackstone continue to amass unprecedented amounts of capital, as well as benefit from economies of scale, these competitive insights will play a significant role in informing investment strategies. Because tech-enabled firms can find the insights they need to make informed investment decisions within centralized systems, investors will continue to operate at a faster pace.
14. Cybersecurity Takes Center Stage as Data Security Comes Into Question
Data has always stood as a central pillar of the commercial real estate industry, but the new tools available have increasingly emphasized its value. Increasingly frequent data breaches, however, have highlighted the urgent need for a strong focus on cybersecurity. To protect against ransomware attacks, firms need to take additional measures, using modern standards as the benchmark.
According to NAREIT, BDO USA LLP, a professional services firm, identified that 92% of the 100 largest publicly traded REITs considered cybersecurity a threat, up from 63% in 2015. 96% of office-focused REITs considered it a threat, as well as 93% in hospitality, and 92% in multifamily. From a financial standpoint, data has already more than proven the importance of increasing security measures. Kaspersky found that, on average, an enterprise-level breach cost $1.41 million in 2019, which increased from $1.23 million in 2018.
Throughout the lifecycle of an asset, data might flow through multiple systems as it is handed off through various departments. To sufficiently protect data at every touchpoint, firms must ensure that every platform data flows through meets required standards. From providing role-based access to platforms, to tracking user activity on those platforms, and sophisticated network controls, the need for an advanced approach to cybersecurity is stronger than ever.
As you audit existing platforms and add new ones to achieve these goals, look for best-in-class security standards, particularly SOC 2 Type 2 compliance, the industry standard in data security. With investors’ best interests in mind, the commercial real estate trend toward advanced cybersecurity will only become increasingly prevalent.
Embracing Commercial Real Estate Trends
The commercial real estate world is operating at an unprecedented, lightning-fast pace. For investment management firms, deal management software is streamlining the ways that firms source, analyze, execute and report on deals, all within one centralized platform.
Download this free white paper to learn more about deal management software’s crucial role in a modern investment management firm’s tech stack.