One of the challenges for any investor in the commercial real estate market is to avoid becoming caught up in the immediacy of the market. Having the ability to take a step back and use a longitudinal look at commercial real estate over the last two decades is a more effective investment strategy moving forward.
In the September 24, 2021 Commercial Repeat-Sale Indicies report, four of the major U.S. commercial real estate sectors were rated with regards to their performance over the last quarter century. This background is surprisingly positive, with some of the doom and gloom anticipated in the early days of the COVID-19 pandemic failing to materialize. The government programs to protect businesses through targeted types of loans and relief assistance had a part in reducing the anticipated bottoming out of markets. In addition, the critical nature of many businesses as part of the infrastructure of communities, global supply chains, and essential services also added a layer of protection. Most notably, the foreclosure rate on commercial real estate did not change significantly through the last two years, nor did the price of real estate rapidly drop. At the same time, investments in the construction of new commercial real estate continued to increase, a trend that has been ongoing for decades.
Office Buildings
In the report, the June 2021 U.S property type index for office buildings across the country was 227.4% higher than in 1996. While there are increased vacancies in major centers, how long this continues to be a factor is not clear. Companies continue to work with employees in partial or full remote work agreements. Still, the essential staff is slowly coming back to full-time in-office work, which is a good indicator of future trends.
Industrial Facilities
Investing in industrial real estate continues to be one of the hot spots for investors. With a 310% increase in the U.S. property type index since 1996, this is considered to be an area with the potential for significant growth in the future. Large facilities used by Amazon, Lowes, Home Depot, and others have driven this market.
Retail Stores and Outlets
The category of retail commercial real estate encompasses diverse types of buildings. The U.S property type index for retail is up 259.7% in 2021 over that in 1996. While malls and small stores are facing increasing vacancies, the large volume retailers see increases, particularly for one-stop-shopping outlets like Walmart, Costco, and larger local chains.
Multifamily Real Estate
Up 542.9% in the U.S property type index since 1996, this is one sector that benefited from the bottoming out of the residential real estate market and the high level of foreclosures between 2006 and 2014. As the population ages and people move from large centers post-pandemic, the demand for multifamily properties outstrips the market availability both for apartment seekers as well as investors in both major centers as well as smaller cities and towns.
