Our commercial real estate market has been on a wild ride this year. The divide between winners and losers amongst CRE property types (multifamily, industrial, office, retail, hospitality, etc.) deepens as we all adapt to a new way of living. Entering our final quarter of the year, we took this opportunity to analyze what has happened so far and make some predictions on the immediate future of CRE.

Some of our findings might surprise you.

This blog is a collaboration between StackSource teammates, Garet Abrams and Huber Bongolan, to offer you some insight into what we advise our clients to look out for.

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• Which commercial real estate sectors received the best returns as of H1 2020 and which sectors have suffered the most?
• How have rent collections been affected for the different product types?
• What does the immediate outlook look like for commercial real estate?

Commercial Real Estate in 2020

It’s no secret that Covid-19 has sent the commercial real estate world into a frenzy. When the pandemic reached US soil, no one knew how the market would pan out. There remains much uncertainty but, as we continue to move forward, we’re able to look back at the first half of the year (H1 2020) to determine how different sectors fared.

Let’s talk statistics

Per Reit.com:

• Highest H1 2020 returns: 33.73% for Data Centers, 17.98% for Infrastructure (Cell Phone Towers), and 15.02% for Industrial/Logistics.
• Lowest H1 2020 returns: -53.07% for Lodging/Resorts, -39.72% for Retail, and -23.42% for Office.

Per Commercial Property Executive:

• At least 95% of rent obligations were collected from the tenants of Medical Office, Multifamily, Office, and Industrial sectors in the first half of 2020.
• Medical Office led all product types with a rent collection percentage of 99.8%, while Multifamily came in second at 97%.
• Office even performed well with 96.1% of rent being paid (3rd best performing sector).
• Industrial sector was able to collect 95.8% of tenant rent.
• Single-tenant and Multi-tenant retail sectors struggled with rent collections. 86.8% of rent obligations were met for single-tenant retail, while 74.3% of rent obligations were met for multi-tenant retail.

As an investor, what does this mean for you?

Based on the data, the most opportunistic investments are in hospitality, retail, and traditional office sectors. Social distancing measures and mandated retail closures are hurting these property types that rely on non-essential human interaction.

On the other hand, with more companies moving their operations online, it’s no surprise that data centers, cell phone towers, and industrial properties posted the best H1 2020 returns. The world is moving even faster towards digital.

Although traditional office properties had one of the worst returns, office tenants are still paying their rent at a high percentage. This divide signals poor investor sentiment as to the future of office even though tenants are still able to pay rent.

Unfortunately, retail properties produced both terrible returns and had tenants that struggled to pay rent. On the capital side, most lenders are only interested in lending on “essential” retail (also known as “internet-resistant” retail).

What does the future look like?

Research by Marcus & Millichap anticipates that medical office and industrial will continue to lead rent collections throughout 2020. Multifamily rents in metro areas may suffer in the short term as vacancies rise because renters are moving to suburban areas. Single-tenant retail could have a speedy recovery because these tenants are able to adapt operations quicker. Multi-tenant retail will continue to struggle the most with rent collections, especially properties without necessity-based tenants.

Good luck out there friends.

We’re happy to engage with you in the comments so that everyone can learn. Please share your thoughts and questions and if you prefer to share privately, feel free to email us at huber@stacksource.com and garet@stacksource.com.

Another way to stay in touch:

• Garet Abrams — https://www.linkedin.com/in/garetabrams/
• Huber Bongolan — https://www.linkedin.com/in/huberjr/