It’s hard to believe it’s been five years since the beginning of the COVID-19 lockdowns. At that time commercial real estate, like other industries, was in turmoil due to forced closings. How has the industry bounced back?
Turns out inflation would be a larger source of concern, and the results of return-to-office mandates and adaptive reuse, among other solutions, remain to be seen.
Investment Values
By the end of 2020, global CRE volumes were down 26% at $833B, according to CBRE. But in 2021, real estate investment had its best year ever, when $1.3T of real estate was transacted across the globe.
Soon afterward, central banks began raising interest rates, moving from 0% to 5.5% in the 18 months between mid-2021 and 2023. As a result, the cost of borrowing was much higher than real estate cap rates, meaning that some investors were paying more in interest than they were getting in rent.
Distressed Properties
In spring and summer 2020, many believed there would be a significant opportunity to buy good assets at distressed prices. The total volume of distressed assets in the U.S. jumped from $25B at the end of 2019 to $55B at the end of 2020 before declining back below $50B at the end of 2021, according to MSCI.
By the end of 2024, that number was back to $102B – half of that, not surprisingly, in the office sector. But investors are still wary of diving back into office investment, unless considering adaptive reuse (for example, converting office property to residential).
The News of Retail’s Death Has Been Greatly Exaggerated
At first, the pandemic lockdowns appeared to be the death knell for retail real estate. Between mid-February and mid-March 2020, shares of retail REITs plunged. As expected, e-commerce sales increased and have remained steady, including online U.S. grocery sales.
Yet according to Bisnow, grocery-anchored retail is appearing on the shopping lists of major investors again, and retail REIT stocks have returned to pre-pandemic levels.
