“Bubble Watch” explores trends that may indicate upcoming economic and/or real estate market problems.
Buzz: Talk about a winning hand. Last year, all 11 slices of a commercial real estate index saw gains — and 10 niches saw double-digit increases.
Source: The Green Street Commercial Property Price Index tracks the values of large, “institutional-grade” income-producing properties across the country.
As the economy adjusted to life in the pandemic era, a shopping spree for commercial goods forced winners and losers to be separated from the industry in a study of the size of interest rates. ‘appreciation.
It may have been a tough year for the owners, operationally. But landlords have been rewarded, at a minimum, with appreciation – that’s the increase in asset value – whether the tenants are consumers or corporations.
Commercial property values across all segments tracked by Green Street rose 24% last year to a record high – a mild turnaround from an 8% decline in the nine months of 2020 following the outbreak of coronavirus.
Why? The high demand for space is reducing vacancies in many real estate niches. As a result, rents jumped whether the properties housed people or goods. And investors wanted to get in on the game.
So, in another one of the weird pandemic-era real estate twists, the 2021 price rebound has sent Green Street’s all-property benchmark up 14% since COVID-19 hit the economy.
It should be noted that it has not been a universal one-way road for homeowners and investors.
Consider how the 11 commercial property niches tracked by Green Street fared, ranked by their price gains in 2021; how categories fared in a tough 2020 once the business chills of the pandemic hit; and the total change in value during the pandemic era.
At a minimum, these rankings are a fair summary of the properties that have been in high demand over the past two years…
No. 1 in self-storage: When lives are disrupted — like the pandemic and its short, steep recession — people find places to stuff their wares. This is why this niche grew by 66% in 2021. This follows a flat performance in 2020 in the months following the arrival of the virus. This represents a gain of 66% in the pandemic era – the No. 1 performance among the 11.
No. 2 Industrial: Everyone wanted everything yesterday, so businesses also needed space to move and store goods. The value of warehouses and factories jumped 41% in 2021 after rising 9% in 2020. Pandemic-era total? A 53% increase — #2.
Housing no. 3: After the closings ended, many people wanted to leave the city. These desires to travel have fueled a hotel rebound. Values rose 32% in 2021 after falling 25% in 2020. For the pandemic era, however, hotels are still down 1% – the second worst performance as business travel remains dead .
No. 4 Strip malls: Online shopping is not for everyone or everything. Goods that are not usually delivered (think groceries); and services (think medicine, beauty, or catering) power neighborhood malls. After initial pandemic losses – down 13% – this slot rebounded to a 30% gain in 2021. So for the pandemic era, that’s a 13% increase in value – #6 .
Apartments No. 5: People have to live somewhere. With property expensive and roommates risky, rental demand – and rents – have increased. Values rose 29% in 2021 after falling 5% in 2020. Pandemic era? A 22% increase — #4.
Shopping Centers No. 6: The most surprising real estate revival may be due to the fact that many large shopping centers are probably worth more dead than alive. Values rose 27% in 2021 after falling 20%. So that’s a 1% increase for the pandemic era — performance #9 — for a niche that had a rocky future long before COVID-19.
No. 7 Individual stores: Owning the real estate that houses these stores in a mall parking lot has become a popular “net lease” investment. This category grew by 26% in 2021 after falling by 7% following the coronavirus. The era of the pandemic? A 17% increase — #5.
No. 8 Mobile home parks: All residential property was hot last year, and this niche jumped 24% after growing 8% despite coronavirus disruptions in 2020. Pandemic era? Up 34% — third best performer.
No. 9 Student accommodation: Back to school (ie on college campuses) has improved the outlook for this category. Dorm value rose 16% in 2021 after falling 6% as most students studied at home in 2020. Pandemic era? 9% increase — No. 7.
No. 10 Health: Problems in aged care facilities were a huge challenge, but patients who consulted doctors as restrictions loosened were helping owners of medical properties. Values in this group rose 10% in 2021 after the niche’s initial 5% decline. For the pandemic era, a 5% increase — #8.
Finally, the offices: Will they or not? Workers returning to offices, that is. The risk of tenant losses held gains at 6% in 2021 after a loss of 9% immediately after the virus. The era of the pandemic? The worst performance in the industry with a drop of 4%.
On a scale of zero bubble (no bubble here) to five bubble (five alarm warning)… FOUR BUBBLES!
Recall that significant price increases do not occur only in commercial real estate. Stocks rose 40% over the same period and US homes appreciated 30%. You may find “cheap” income-generating assets at the bottom of this ranking.
But overall, are the outsized gains in many commercial real estate niches largely the byproduct of the extra demand created by the “new normal economy”? Or are investors overreacting to temporary shifts in spending, working, and shipping patterns?
Moreover, was the breathtaking appreciation largely due to a buying frenzy fueled by investors’ thirst for income-generating properties? And will this appetite reverse dramatically as interest rates rise on less risky assets in 2022 and beyond?
Jonathan Lansner is a business columnist for the Southern California News Group. He can be contacted at [email protected]