Commercial Investment Real Estate Winter 2022 | Page 29

Northeast and California saw net losses in from January 2020 to June 2021 .
“ There are great reasons for people to move to Florida — it ’ s a consumption economy , a great vacation destination , and a great retirement spot ,” Costello says . “ It just makes sense for Florida to be seeing population growth . But it ’ s not something where every investment bank in New York is going to pick up and move all their staff down there .”
THE RETURN OF THE OFFICE ? The office sector had another roller coaster of a year in 2021 , as the growing momentum toward workers returning to offices across the country was wiped out by the midyear arrival of the delta variant . While that hiccup , along with the ensuing omicron surge , extended remote work for millions of Americans , leasing activity sustained an upward trajectory .
After bottoming out at 25.8 sf in 4Q2020 , leasing space nudged up in the following three quarters , eventually reaching 39.2 million sf in 3Q2021 , according to JLL Research . More than 100 million sf of office space is under construction , which is a decrease from 2019 ’ s 126 million , but any new supply in a market that saw -7.3 m sf of absorption in 3Q2021 tilts the deck further in favor of tenants .
“ With a large construction pipeline through the end of 2022 , however , conditions will remain tenant-favorable for the foreseeable future , while an accelerated rate of relocations to newer supply will lead to even greater divergence in performance across office assets ,” according to Phil Ryan , director of U . S . office research for JLL . “ Even with a more gradual reentry process and potentially more balanced hybrid plans than initially expected , the crucial role that physical offices play in fostering corporate culture , productivity , and innovation will underline the longer-term need for space that meets evolving tenant and employee preferences .”
“ The office recovery is going to take longer as people return to work , but investors are going to deploy capital into that sector ,” Bitner says . “ And as long as you ’ re putting new money in , you can ride that wave .”
While one deal doesn ’ t mean a complete recovery for the sector , Google ’ s $ 2.1 billion purchase of 1.3 million sf of space in New York in September 2021 is a signal that capital will return . The deal could be the biggest in the U . S . since COVID-19 hit , and it highlights interest in major urban markets . Usual suspects like New York ( 20 million sf ), Boston ( 7.53 million sf ), and Silicon Valley ( 5.9 million sf ) lead the way in construction , according to JLL Research .
But capital expenditures in the wake of a global pandemic are a bit more complicated . Public health and safety , ergonomics , and worker comfort are necessary considerations in developing new or renovating old assets .
POSITIVE OUTLOOKS
“ The capex issues are just huge ,” Costello says . “ If you do come back to the office , someone is spending a lot of money on new filtration systems and healthier settings for the building . You want to make sure the elevators can run in a rapid fashion and try to [ minimize ] crowding . That ’ s significant spending . Who ’ s paying for that ?”
That question remains to be answered in a broad sense , but it will not be a deal-breaker for capital looking to be deployed in a sector that ’ s showing signs of recovery .
State-By-State Population Growth
“ Even with this bump in the road , macroeconomic indicators remained optimistic , albeit slightly downgraded compared to forecasts from earlier in the year ,” Ryan reports . “ The office market showed signs of promise and the beginnings of tenants firming their longer-term utilization plans .”
BACK IN BUSINESS For a CRE sector that can be linked to the day-to-day news of COVID-19 , retail looks to be in a promising position entering 2022 according to a number of industry experts . Largely overshadowed by stellar performances in multifamily and industrial , the sector saw its share of overall investment transaction activity in CRE drop to a historic low of 9 percent in 2021 , according to CBRE data .
But after last year , where capital continued to flood those stronger sectors , retail may have found its footing and could attract more attention in the next 12 months .
“ Investors have been a little slow to pick the ball up on the improvement in the retail ,” Bitner says . “ I ’ m not talking about the ghost malls or strip centers in economically challenged areas . Investors have been a little slow in returning to retail in areas that are strong , where there ’ s an emphasis on personal services and grocery-anchored centers .”
By late 2021 , the discount rate in public REITs for shopping centers was -2.3 percent and regional malls was -8.3 percent . Retail boasts the highest cap rates — 6.4 percent — compared to office , industrial , and multifamily , but they are starting to compress as investors reevaluate the market .
1.01 % or Higher 0.51 % – 1.00 % 0.01 % – 0.50 % -0.59 % – 0.00 % -0.60 % or Lower
Source : U . S . Census Bureau
“ The improvement in the discount ratio to net asset value shows [ the growing confidence of investors ] in the retail sector ,” writes Daniel Diebel , a retail economist with CBRE , in a December 2021 report . “ Stock prices for major retail REITs have bounced back since early 2021 . Rising stock prices reflect investors ’ optimistic expectation for the performance of retail properties going forward .”
While e-commerce was the story of 2020 as lockdowns and quarantines rolled across the U . S ., its share of overall retail sales ebbed in 2021 . According to seasonally adjusted U . S . Census Bureau data , e-commerce has steadily declined from 13.8 percent of all retail sales in 3Q2020 to 13 percent in 3Q2021 . Brick-and-mortar retail is hardly doomed , but not all assets are equal .
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