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Mid-Year 2021CRE Market Update

Posted by Jeff Finn on Aug 31, 2021 8:00:00 AM

The RealNex Webinar Series hosted by CEO Jeffrey Finn continued on Thursday August 26 with the Mid-Year 2021 CRE Market Update featuring Dr. Jeffrey Fisher. Dr. Fisher highlighted the continued strength of the overall market lead by record performance in the industrial sector, and the white-hot residential sector fueled by the growing institutional appetite for single-family rentals. The industrial market achieved its highest quarterly returns ever and the overall market realized the best quarter in over a decade

While it has historically not been an institutional investment class, the single-family rental market has emerged, growing in size and significance, since the end of the 2008 global financial crisis. Having dipped their toe into the sector, institutional investors were able to benefit from the strong performance during Covid.  From the beginning of 2020 through 7/30/21 the sector realized returns of 37.4%. These returns compare favorably to apartments up 9.8%, and hotels, office and retail down respectively 16.1%, 11.7% and .8%. The only sector to outshine the emerging single-family rental market was industrial with a blistering gain of 47.3%. With such strength its not surprising that REITS have poured $52 Billion into Single-Family Homes.

Buoyed by the strength of the industrial sector, Total Returns exceeded 3.5% in Q2 2021. Even with a decline in NOI, cap rates continued to trend lower driving overall returns higher. While there was a notable flow of capital out of the market, it wasn’t enough to weaken demand for property. In fact, transactional activity returned to long term trend level and a surplus of capital is now poised to reenter the market. Indicative of the overall vibrancy of the commercial real estate asset class, all tracked sectors returned to positive quarterly gains. Lead by industrial at 8.5% and apartments at 3.8%, even the hardest hit sectors of office, retail and hotels improved 1.5%, 1.0% and .75% respectively.

When polled, a solid 60% of the audience believed industrial would continue to lead the way in the second half of 2021. Apartments received 20% of the vote, while retail and hotel captured 10%. Not surprisingly, no participants felt that office would be the top performing sector.

From an NOI standpoint, industrial continued to lead the ranks with 6% growth. Interestingly, office yielded 2.8% growth while apartment and retail NOI declined by 12%. Further measuring the health of the market fundamentals, industrial vacancy tightened to approximately 3% while office ballooned to over 12% with apartment and retail nestled in the middle at 7.5% and 9 % respectively.

While markets continued to improve Covid imparted trends continue to impact the industry, with the best performing subsectors in the suburbs – suburban office performing better than CBD properties, garden apartments doing better than urban high-rise and neighborhood centers outshining malls. Covid also is driving the best performing markets. This has not been a cycle lead by the major metro gateway cities but rather by the industrial hubs and fast growing secondary markets. Indeed, of the Top 25 metros more than half were in Florida, California and Texas. The leaderboard included Riverside, Indianapolis, Newark, Cambridge and Ft. Worth. Not surprisingly Phoenix, Nashville, Atlanta, Charlotte, Raleigh and Las Vegas made the list as well.

Although returns by property sector are at a relative high, cap rates remain tightly banded at historic lows. Apartments and Industrial are both in the 3.5% range with Office and Retail in the low 4.0% range. 63% of the webinar audience believed that cap rates would tick up slightly from here to the 4.0-4.5% range, although a solid 21% forecast a drop below 4, and a significant 16% expect a pop to above 4.5% by year-end.

Asked to prognosticate on the year-end values of institutional real estate, the audience was generally bullish. 43% calling for values to be higher, 29% see values stable and only 24% expected a decline. 5% confessed they had no idea!

In summary:

  • Total Returns at a 10-year high
  • Industrial Returns at all-time high
  • Transactional activity back to trend
  • Cap rates at low with the lingering question of when inflation and interest rates will reverse the trend, and
  • Caution remains as we watch external events such as Covid, Tax and Fed policy

To review the full session please click the links to access the video replay and the presentation deck.

Topics: CRE, Price trends, ncreif property index, RealNex Webinar Series

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