Industrial Real Estate Clear Leader in Moody’s Report

The true impact of the pandemic on commercial real estate will likely transpire this year, the firm’s latest report predicts.

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The office and industrial sectors are headed on diverging paths in 2021 and into the post-pandemic era, according to the latest Moody’s Analytics REIS report.

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The numbers tell a rather grim story in the office sector, but it really is all relative. The national vacancy rate climbed to 17.7 percent in the fourth quarter of 2020, marking a 40 basis-point increase over the third quarter and a 90 basis-point increase over 2019. Still, this year-over-year increase in the vacancy rate pales in comparison to that seen from 2008 to 2009, the first year of the Great Recession, when the office vacancy rate skyrocketed nearly 200 basis points. The fact that the national vacancy rate didn’t reach its peak during the Great Recession until late 2010, is a major indicator.

According to the report, “That means the true impact of this downturn will likely transpire this year.” Vacancies are likely to see the largest increase this year, with nominal increases continuing through 2023.

National rental rates proved a bit of a mixed bag, however, with asking and effective rents declining by a respective 0.2 percent and 0.6 percent in the fourth quarter, while asking rents increased 0.4 percent from 2019 to 2020 but effective rents declined 0.7 percent year-over-year. According to the report, completions of new office space—though they were down by 32.3 percent year-over-year in 2020—still pushed asking rents up ever so slightly, and the standard lags left prices without the expected distress.

Looking ahead, REIS predicts that the national office vacancy rate will reach 19.4 percent by the end of 2021 and hit a peak of 19.7 by 2022. Asking and effective rents will likely decrease by 4.9 percent and 7.4 percent, respectively, this year.

“REIS therefore expects that the office sector will continue to function under significant pressure, but the greatest risk remains in the intermediate and long-term horizon,” according to the report. “There remains much talk about employers reevaluating their office space needs, depending on what the post-pandemic world looks like.”

The solid sector

If there is a pandemic-proof sector, it is likely the industrial sector, buoyed by the related rise in e-commerce and logistics activity. The warehouse/distribution market saw its vacancy hold relatively steady, going from 10.3 in the fourth quarter of 2019 to 10.6 in the second and third quarters of 2020 and 10.5 in the fourth quarter of 2020.

With higher occupancies came higher asking and effective rents, which increased a respective 1.3 percent and 1.5 percent year-over-year. And fourth-quarter net absorption totaled 35.4 million square feet. “The fourth quarter data shows how the warehouse/distribution market is defying the downward trend seen in other property types,” according to the report.

The flex/R&D market saw its vacancy rate drop from 10.3 in the third quarter of 2020 to 10.2 percent in the fourth quarter of 2020. Additionally, asking and effective rents rose 0.5 percent quarter-over-quarter, and a respective 1.2 percent and 0.8 percent year-over-year. Absorption for flex/R&D properties totaled approximately 1.2 million square feet on the heels of two consecutive quarters of occupancy declines.

“As much of the commercial real estate market is reeling in the wake of the pandemic, the warehouse/distribution and flex/R&D markets continued to expand in the fourth quarter, largely because they are serving a need that other property types cannot,” according to the report.

This trend is expected to continue for a quarter or two, but once the vaccine is fully adopted, many will be eager to get out and shop. “Yet, many retail stores will not survive even if they have already. In short, the push and pull between brick-and-mortar retail and e-commerce will continue for some time, but the warehouse/distribution sector should see positive occupancy growth this year and next,” the report concludes.

Read the full reports by Moody’s Analytics.

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