Not unexpectedly, the sentiment of commercial real estate professionals plunged by the mid-point of this year due to the devastating impacts of the coronavirus pandemic on most commercial real estate sectors.
With the exception of a few sectors, such as warehouse, medical-office-lab space, logistics, cold storage and last-mile distribution, most commercial real estate sectors continue to struggle with COVID-restrictions, late rental payments, etc.
Recently, national real estate advisory firm RCLCO released its mid-year Real Estate Market Sentiment Index, which also included detailed analysis of the current state of commercial real estate industry sectors and prospects for the future.
In addition, LoopNet published an article entitled “How Coronavirus Will Impact Each Commercial Real Estate Sector Analysis and Predictions from CoStar Economists” that also provides perspective on how the commercial real estate industry will fare going forward.
The RCLCO Current Real Estate Market Sentiment Index (RMI) plunged as expected in mid-2020, to a low 9.2, and the Future RMI, now at 36.8, calls for some continued declines in conditions, but also the beginnings of recovery in a few sectors, within a year.
The current RMI value of 9.2 was the lowest level since RCLCO began recording the index at the end of the Great-Recession. The previous low was recorded in the fourth quarter of 2018 at 37.5 in the wake of the U.S. federal shutdown that occurred in December 2018. Prior to the coronavirus pandemic, in the fourth quarter of 2019 the index was just under 65.0. RMI values in the 60 to 70+ range are typically indicative of very good market conditions. Values below 30 are typically coincident with periods of economic and real estate market stress/recession. The nearly 56-point drop in so short a period mirrors the speed and depth of the damage that the pandemic has wrought upon the U.S. economy and real estate markets, the report states.
Report authors Brad Hunter, managing director, Charles Hewlett, managing director, and Grace Amoh, analyst with RCLCO, state that industry leaders see the severe declines as being behind us, but some sectors still face a moderate downside. A total of 16% of survey respondents believe the markets will be “significantly” worse over the next 12 months.
Most survey respondents believe that the multifamily rental, active adult, and for-sale residential sectors have already hit bottom, along with land; although the second home/resort, and seniors housing sectors are still in full downturn mode and may have some time before hitting bottom.
Homebuilders, subdivision developers, and master-planned communities in the next 12 months are expected by the largest number of participants to be past the downturn and well into “stable” business conditions. This is consistent with the firm’s expectations that strong household formation rates will resume, driving demand for new homes.
Respondents believe that the hospitality sector is approaching or at the bottom, with luxury and resort hotels the most commonly believed to be in “full decline” or at “bottom,” the report states. The largest number of respondents believe that recovery will begin within a year in the hotel business.
The retail sector was mostly seen in “full decline” in June, but RCLCO notes that there is a significant variation between secondary regional malls, which it states in the report is considered to be in the worst shape of all, and grocery-anchored community/neighborhood centers, which are viewed as holding up well.
“The office market is still seen in decline, and there are varying opinions among participants as to the chances of recovery within the next year, reflecting uncertainties about the economy and the durability of the work-from-home trend,” the report notes.
CoStar executives in the LoopNet report offer predictions on key commercial real estate sectors.
One bright spot is the industrial sector, which CoStar believes “is the most well-positioned to weather the storm.”
“With virtually all shopping now online, warehouses are the new retail space," said Abby Corbett, managing director and senior economist for CoStar in Chicago. Plus, other factors are driving demand. She adds that supply chain disruptions caused by the COVID crisis may prompt some retailer and manufacturers to hold more inventory, and many manufacturers in industrial uses may look to onshore operations to limit their exposure to global supply chains.
To access the full RCLCO report, go to:
https://www.rclco.com/publication/rclcos-mid-year-2020-sentiment-survey-a-deep-plunge-but-some-sectors-coming-off-the-bottom-already/
To access the LoopNet article, go to:
https://www.loopnet.com/learn/how-coronavirus-will-impact-each-commercial-real-estate-sector/807111658/
