Catalyzed by COVID-19, dramatic shifts in the way we live, work and shop have impacted the best bets for investing in commercial real estate in 2021.
Industrial assets have demonstrated stability and offer the biggest growth potential, according to Rene Circ, senior managing director and Chief Operating Officer of GID Industrial at GID Investment Advisers LLC, who spoke at CRE.Converge Virtual 2020 this week. Industrial leasing activity has recovered since the pandemic began and is now at higher levels than before the COVID-19 shutdown. Strong e-commerce performance accounts for some of this industrial resilience.
Circ spoke as part of a panel with Wade Achenbach, executive vice president of portfolio management for Kite Realty; John Drachman, cofounder of Waterford Property Company; and George Hasenecz, senior vice president for investments at Brandywine Realty Trust. The panel was moderated by Will McIntosh, Ph.D., global head of research, USAA Real Estate.
“If there was a person who had not shopped online before the pandemic, that person doesn’t exist now,” said Circ, citing that e-commerce sales grew by 44.5% year over year in the second quarter of 2020 and now makes up 16.1% of total sales. Even brick-and-mortar retailers are relying more heavily on e-commerce to sustain themselves.
Don’t be so quick to count retail out, countered Achenbach, who explained that not all retail is created equal. While already struggling shopping malls were hit hard by COVID-19 closures, open-air shopping centers were performing at their peak before the pandemic and continue to have the highest small shop occupancy in the history of the sector.
Retail and e-commerce will continue to work hand in hand and need each other to be successful. “Amazon is the largest online-only retailer in the world, but it has recognized the value of retail with its purchase of Whole Foods,” Achenbach explained.
As with the retail sector, many have predicted the permanent demise of the office market, since so many people are currently working from home while offices sit empty. Hasenecz, however, is confident that offices will bounce back. “The office market has grown gradually, with vacancy rates only around 10% to 12%,” he said. “Offices take longer to build than other sectors so it’s harder to adjust to changing market conditions, but when you think about economic trends over the last couple decades, each time the office industry has evolved and adapted to the challenges.”
Even as health and safety guidelines are keeping us working from home and meeting online, most workplaces benefit from people being in a room together. People want and need to come together to collaborate. Eventually, Hasenecz explained, Class A office space will be in high demand. Businesses will be “looking to make sure employees feel safe,” which means properties with the best HVAC systems, fresh air, touchless technology, and more personal space per employee.
Meanwhile, with many workers telecommuting, demand for apartments in the third quarter was the strongest ever, predominantly in suburban markets. Workers aren’t as tied to living downtown near their now-closed offices, and they’re looking for more space, so they’re moving to larger units in garden-style apartment buildings. Drachman believes there are still tremendous opportunities in both suburban and urban markets for multifamily buildings, depending on how you invest. Because more people are moving to the suburbs, urban vacancies will lead to lower rents. Next year, once there’s a coronavirus vaccine, many people will return to urban apartments, creating a great long-term buying opportunity.
Overall, it’s clear that in times of market turbulence, there are still investment bright spots to be found.