This blog post was last updated on March 8, 2022 with new information about the latest commercial real estate trends.
The commercial real estate world endured significant volatility at the onset of the pandemic. From disrupting markets, to streamlining internal processes, and the rapid adoption of proptech, firms continue to respond to a faster-paced landscape. As commercial real estate sales rebound, firms are now finding their way to success in a transformed market filled with new challenges and opportunities. 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
- Commercial Real Estate Market & Asset Class Trends
- Commercial Real Estate Technology (Proptech) Trends
Commercial Real Estate Financial Trends
1. Commercial Sales Transactions in 2021 Totaled $809 Billion According to Real Capital Analytics, Surpassing 2020 & 2019
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. In Q1 of 2021, commercial real estate sales were down by 28%. 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 of 2021.
According to Real Capital Analytics, commercial real estate sales transactions totaled $809 billion in 2021, exceeding 2019’s $600 billion total and doubling the 2020 total. Investors responded to a changing market, targeting asset classes that became favorable in the pandemic’s wake. Warehouses and logistics properties continued to be a core focus as the e-commerce boom continues. With rents higher than ever, multifamily investors also doubled down. Hotels and resorts, which suddenly became an object of focus following the return to travel, also saw a boost in popularity. Investors continued to be creative in finding new ways to leverage asset classes experiencing downturns.
2. Commercial Prices Increased by 24.4% in the Last Year as of December
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 24.4% year-over-year as of December. Self-storage and industrial saw the highest increase in price, at 66% and 41% respectively. Office and malls saw the lowest price boost, at 6% and 27% 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.
5. Rental Growth & Relatively High Demand Drive Market-Wide Expansion
A growing economy with increased employment, steadily rising wages and healthy savings created an economy in which households have more to spend, driving market-wide growth in the real estate vertical. Now, firms are seeking new ways to achieve their own growth in a highly favorable environment.
Following the wide availability of vaccines and a resurgence of relatively normal life, real estate demand is rising, in step with other market indicators. Current projections point to ongoing growth, creating even more opportunity for investors.
6. Debt Funds Experience Influx of Nonbank Capital
As banks struggle to navigate red tape that makes it more difficult to approve loans on riskier deals, the share of real estate debt fund capital provided by banks has decreased. In turn, institutional players like insurance companies and pension funds have raised more debt capital. Many of these institutions intend to continue investing heavily in the commercial real estate market.
7. ESG Transitions from Trend to Important Criteria for Commercial Real Estate Investors
Environmental concerns have permeated every sphere of life, and commercial real estate trends are no different. Competitive investors have increasingly prioritized ESG, or environmental, social and governance-related considerations. According to PGIM, over two thirds of investment management firms have now adopted ESG standards in their investment criteria, with a particular emphasis on environmental factors.
While ESG is nothing new, the jolt forward occurred most recently in US and Asia Pacific markets, which lagged behind Europe.
Beyond doing their part to help the environment, environmentally friendly investments can actually be quite lucrative. Boosting energy efficiencies lowers operational costs, creating higher profit margins. Additionally, ESG certifications can open doors to new funds, exclusive lending deals and even more selective, profitable tenants.
Commercial Real Estate Market & Asset Class Trends in 2021
8. 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.
Breaking from the downward trend throughout 2020, retail had grown somewhat by the end of 2021. The fastest growing areas in the US were characterized by their location, service offerings and neighborhood presence. However, there’s still a long way to go before the conversation shifts from recovery to net expansion.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
15. Cities, Particularly Central Business Districts, Rebound
Early on in the pandemic, cities suffered as residents retreated to the suburbs for more space and stronger amenities. Now, the tides have changed and cities, particularly central business districts, are showing rental growth.
While not all office markets have recovered, demand in some has picked up, driven in part by aggressive hiring. Rent prices have also increased, which could create a more competitive environment as companies navigate a new market.
16. Operational Real Estate Like Storage, Senior Living & Student Housing Are Trending Upward
While not a traditional focus for most investors, operational real estate in niche markets like storage, senior living, student housing and life sciences have all gained momentum. From 2020 to 2021, the percentage of total CRE investment on operational spaces doubled to 12.3% in 2021. As the share of older Americans needing living facilities and healthcare services grows, this commercial real estate trend will likely gain steam.
Commercial Real Estate Technology (Proptech) Trends
17. 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.
18. 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.
19. 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.