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Unique Challenges Continue to Arise in Commercial Real Estate

Florida Realtors’ Economist: NAR released its Commercial Market Insights report, and it suggests that nuances between asset types and class indicate opportunity and risk.

ORLANDO, Fla – The Commercial Market Insights report authored by the National Association of Realtors® Research Group was recently published in October 2020. Here are several key takeaways:

Vacancy up but not affecting rents – yet

Vacancy is expanding but rents remain stable as landlords seek to minimize revenue losses arising from occupancy losses.

Transaction volume cratering

Commercial sales transactions overall have contracted nearly 70% year-over-year in August 2020, according to Real Capital Analytics. The largest declines were in office and retail, falling by 73% respectively, while multifamily and industrial fared slightly better, declining by 65% and 62% respectively.

Increased risk premiums reflect market challenges

Risk premiums (difference between cap rate and the 10-Year T bond) have increased across all asset types since April but stabilized over the summer months. Multifamily has the lowest premium at 4.7%, followed by industrial at 5.5%. Unsurprisingly, hotel has the highest risk premium at 8% and retail sits at 5.9%. These premiums reflect the challenges that are felt differently by each asset type and class.

Pricing holds steady

Prices have not seen a dramatic decrease despite overall occupancy concerns, particularly in multifamily and office. This is a reflection on what is trading – mostly prime properties with lower occupancy risk are transacting, while deals on even slightly questionable assets are not materializing.

Suburban office assets is attracting investment

Sales of office assets in Central Business Districts (CBD) have fallen more than sales in suburban markets, reflecting increasing investor interest outside of dense urban cores, though suburban assets are still seen as more risky investments compared to CBD assets.

Industrial is the darling but not always a sure thing

The industrial slice of the market has been doing well throughout the pandemic, but it is important to note that not every industrial property is a logistics property or Amazon. While e-commerce has pulled this property type to the front of the pack, there are still headwinds holding back recovery. Still, success in industrial poses increased risk to retail as shifting consumer behavior favors industrial distribution of goods over direct purchase through brick-and-mortar retail.

Jennifer Quinn is a Florida Realtors Economist and Director of Economic Development

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