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Wednesday, January 19, 2022

Bubble Watch: Will landlords win?

The “bubble watch” searches for trends that may indicate further economic and/or housing market problems.

Discussion: Talk about the winning hand. Last year, all 11 slices of a commercial real estate index posted gains — and the 10 bottom rose double digits.

Source: Green Street’s Commercial Property Price Index tracks the values ​​of large, “institutional quality” income-producing real estate across the country.

Trend

As the economy adjusted to life in the era of the pandemic, a binge for commercial property served to separate the industry’s winners and losers in the shape of appreciation rates.

Operationally, this could be a tough year for landlords. But property owners were at least rewarded with appreciation – that is an increase in property values ​​– whether tenants are consumers or corporations.

Commercial property values ​​rose 24% last year to a record high across all sectors tracked by Green Street – a sweet U-turn from a fall of 8% in the nine months of 2020 following the coronavirus outbreak.

Why? The huge demand for space has reduced vacancies in many real estate sectors. As a result, rents skyrocketed, whether the property contained people or goods. And investors wanted to get in on the game.

So, in one of the strangest real estate twists of the pandemic era, the 2021 price rally propelled Green Street’s all-property benchmark by as much as 14%, as COVID-19 battered the economy.

Newport Beach-based Buchanan Street Partners purchased a new, three-story, climate-controlled self-storage facility in Vista for $34 million. The 112,000-square-foot building in northern San Diego County includes 1,200 self-storage units and 50 RV parking spaces. (Courtesy of Buchanan Street Partners)

amputation

We should note that this is not a universal, one-way path for property owners and investors?

Consider how the 11 commercial properties tracked by Green Street fared based on their 2021 value gains; How categories fared in a harsh 2020 once the pandemic brought business to a halt; and total price changes during the pandemic era.

At least, these rankings are a fair summary of what properties have been the most sought after in the last two years…

No. 1 Self-Storage: When life is disrupted – such as the pandemic and its short, rapid recession – people find room to stuff their stuff. So the spot was up 66% in 2021. This was followed by a flat performance in the months following the virus’s arrival in 2020. This adds up to a pandemic-era gain of 66% – the No. 1 performance among 11.

No. 2 Industry: Yesterday everyone wanted everything, so companies also needed a place to move and store stuff. Warehouses and factories increased in value by 41% in 2021 after rising 9% in virus-chilled 2020. Total pandemic era? A 53% increase – No. 2.

Bubble Watch: Will landlords win?
Land & Houses USA has purchased the 120-room Springhill Suites Anaheim Manget Hotel from Anaheim Resort Hotels LLC. Terms of the deal were not disclosed. Rod Apodaka brokered the deal at RJA Hotels. (courtesy of RJA Hotels)

No. 3 Accommodation: After the end of the lockdown, many people wanted to move out of the city. They urge to travel which operates a hotel Rebound. Values ​​increased by 32% in 2021 after falling 25% in 2020. For the era of the pandemic, however, hotels are still down 1% – the second worst performer as business travel remains dead.

No. 4 Strip Mall: Online shopping is not for everyone or everything. Goods are usually not delivered (think groceries); And services (think medicine, beauty or food) fuel neighborhood shopping centers. After the pandemic’s initial losses – falling 13% – this niche rebounded in 2021 with a 30% gain. So for the pandemic era, that’s a 13% price increase – No. 6.

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No. 5 Apartments: People have to live somewhere. With ownership valued and roommates dicey, the demand for rentals – and rents – increased. The value rose 29% in 2021 after falling 5% in 2020. pandemic period? 22% increase – No. 4.

No.6 Mall: The most surprising may be property revival as many large shopping centers are likely to be more valuable dead than alive. The value rose 27% in 2021 after a 20% drop. So that’s a 1% increase for the pandemic era – No. 9 performance – for a niche that had a challenging future before COVID-19.

Bubble Watch: Will landlords win?
According to the Irvine-based NAI Capital Commercial, the 351,200-square-foot shops in the Dos Lago shopping center in Corona sold for $47,375,000. (Courtesy of NAI Capital Commercial)

No. 7 Personal Store: Real estate ownership has become a popular “net lease” investment for those stores in the parking lot of a shopping center. The category grew 26% in 2021 after falling 7% after the coronavirus. pandemic era? 17% increase – No. 5.

No.8 Mobile Home Park: Last year any residential property was hot, and the space jumped 24% after rising 8% despite the 2020 coronavirus disruptions. pandemic era? Up 34% – Third best performance.

No. 9 Student Accommodation: Back in school (on college campuses, that is) this category of attitudes improved. Hostel values ​​increased by 16% in 2021 after falling 6% in 2020 as most students studied at home. pandemic era? 9% growth – No. 7.

No. 10 Healthcare: Trouble in senior-care facilities was a major challenge, but patients visiting doctors as restrictions eased helped owners of medical properties. Values ​​in this group rose 10% in 2021 after Niche’s initial 5% drop. For the pandemic era, an increase of 5% – No. 8.

Finally, the office location: will they do or not? Workers returning to offices, ie. Tenant loss risk increased 6% in 2021 after a 9% loss immediately after the virus hit. pandemic era? The industry’s worst performer with a decrease of 4%.

how bubbly?

On a scale from zero bubbles (no bubbles here) to five bubbles (five-alarm alert)… Four Bubbles!

Reminder, big price gains aren’t just happening in commercial real estate. Stocks are up 40% over the same period, and US homes have appreciated 30%. You may find some “affordable” income-producing properties at the bottom of this ranking.

But overall, are the massive gains in many commercial real estate a byproduct of excess demand created by the “new normal” economy? Or are these investors overreacting to temporary changes in spending, work and delivery habits?

Furthermore, the eye was applauded because of a buying spree driven by investors’ thirst for income-producing properties? And will this appetite reverse itself dramatically as interest rates on low-risk assets rise in 2022 and beyond?

Jonathan Lancer is business columnist for Southern California Newsgroup. He can be contacted at [email protected]

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