CRE Transaction Drought Expected Until 2022

Altus Group poll indicates significant uncertainty about the effect of Covid on price and transaction volume.

by Dave McKenna, Editor of CREB on September 21, 2020


Commercial real estate transactions may not recover to pre-Covid levels until 2022 according to a recent survey by Altus Group. The poll of brokers, owners, tenants, and other CRE professionals revealed that 58% believe transaction activity will not recover until late 2021, while 28% anticipate depressed volume into 2022 and beyond.

source: Altus Group

The industry is particularly pessimistic about New York, with 60%  indicating that the New York commercial business district is at most risk due to Covid, while other major CBDs like San Francisco and Chicago are seen to be much less vulnerable.

The Canadian-based Altus Group is a commercial real estate consulting and services firm with 75 offices world-wide. Responding to the need for additional market insights during the disruption caused by the global pandemic, Altus Group launched an on-going survey of CRE professionals to gauge the impact of the crisis on the market.

The Market Reflections Poll (MRP) published by Altus Group is a recurring weekly sample of industry sentiment. Each weekly audit focuses on a single topic related to the impact of Covid-19 on the CRE market, such as cap rates, vacancies, and rebounds. Each time a participant responds to one of the weekly surveys, they receive an instant update on the current polling.

The Altus study commenced in May and the first series of polls were recently published in the Market Reflections Poll Report: May – June 2020. The initial surveys reflect the uncertainty in the market. “The survey suggests a wide range of value expectations. Some said no decline while others said significant decline is expected. There is just a  great deal of uncertainty,” said Rick Kalvoda, Executive Vice President at Altus Group.

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The survey is shedding some light on the state of the market during a time when transaction volumes are down and complicating the usual valuation assessments. For example, the demand for social distancing is influencing the use and configuration of office space. But the sudden adoption of remote work is likely to be longer lasting effect of the Covid crisis. “There is a counterbalance to lower density from the rise of remote work. We may see a reverse of the decades-long trend to higher density. But this could be balanced by the fact that fewer people in the space at any given time,” said Kalvoda. “For office space, all change is going to be on the margin. There is only so much a Zoom meeting will give you in terms of collaborating and innovation.”

While some have speculated that the continued economic disruption of the pandemic and the surprising success of the work-from-anywhere experience means that office space will remain vacant and leases will not renew, that has not been the case so far. At this point, corporate occupiers are being cautious. “Tenants are renewing their space and at rates close to what they were paying before. No one is making rash decisions.”

A bright spot in the CRE marketplace is the continued strength of industrial space. The warehouse sector had been robust for years prior to Covid-19. The pandemic had an initial impact on price and transaction volume, but that disruption proved to be short lived. “Industrial space is back and is ahead of pre-Covid levels. There has been an insatiable demand for industrial for five years. First half of 2020 had some value impact, but the opportunity to get into industrial at pre-Covid pricing is over,” said Kalvoda.

The surge in warehouse space in recent years has been driven by the emergence of multichannel retail and ecommerce. The mass social lockdowns ordered to help contain the coronavirus have accelerated the shift to on-line shopping. And the categories of products purchased via apps vs. in-store have suddenly expanded to areas like groceries and restaurants. The products that were once stocked in brick-and-mortar locations is now being staged in storage space as close to the consumer base as possible.

Early indications now suggest that warehouse space demand exceed the space required for an equivalent unit of retail commerce. “Every square foot lost in retail requires a certain multiple of industrial to support the same volume as ecommerce,” said Kalvoda.  “Some estimates are that it takes about three square feet of industrial to support a lost square foot retail to store, pack, ship, and receive returns.”

According to the Altus Group surveys so far, the CRE market expects some significant ,intermediate-term impact from the Covid pandemic to affect pricing and transactions for the next 18 months. Effects are anticipated to vary by a material amount from region to region. At this point the concerns are not dire, though there is a wide spectrum of expectations due to the uncertainty.


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