AREA looks back over the third quarter of 2020 as we breakdown the impact of the economy opening up again and the commercial real estate markets.
With input from our senior leadership, our brokers and our analysts, we aim to provide you with the most relevant and recent info including notable deals and important trends in the economy and in the commercial real estate markets.
ECONOMIC REVIEW: U.S. economy continues to recover from onset of the pandemic and subsequent lockdown this past spring. 30% GDP growth for Q3 shows a strong bounce back but recovery is fragile and showing signs of slowing into year-end as cases spike, unemployment remains elevated and Congress has failed to pass further fiscal stimulus. Continued monetary support from Fed has aided in recovery with rates near zero for foreseeable future and liquidity across capital markets. Path of the virus and additional support from Fed and Congress will likely determine pace and timing of recovery.
RETAIL MARKET: Retail continues to take the brunt of economic fallout from pandemic and lockdown. Leasing and sales volume are down compared to pre-pandemic levels but there are positive signs that segments of retail market can survive and thrive during the pandemic. Large retailers are weathering the storm and continued shift to e-commerce and distribution outside of traditional avenues will help offset losses. Rent growth expected to turn negative in 2021 before rebounding and sales volume is down about 50% YOY. We expect a strong rebound for retail once pandemic has passed.
MULTIFAMILY MARKET: Sales volume is down from pre-pandemic levels as investors paused during lockdown and mostly stayed on the sidelines looking for clarity in capital markets. Deals are getting done but at a slower pace and we expect volume to increase later in 2021 with Fed anchoring rates near zero and liquidity in capital markets remaining high. Vacancy rates have increased approx. 95 bps YOY, and we expect vacancy rates to gradually increase but remain rangebound for next few years. Despite slowdown in sales activity, market fundamentals are better than expected and we see this market weathering the pandemic with activity picking up later in 2021.
INDUSTRIAL MARKET: Industrial market continues to show strength during pandemic as demand for industrial product has accelerated behind increased secular shift to E-commerce sales and distribution. We believe the pandemic accelerated this trend and see demand increasing. Construction starts are strong with square feet under construction up 150% YOY. Sales volume is only down about 50 bps YOY, a positive sign that capital markets remain strong for Industrial product. We see strength in this market continuing for next several years.
OFFICE MARKET: This sector tends to respond more slowly to abrupt changes in economy. The office market is showing signs of short-term weakness from the pandemic as space is coming back to the market with vacant square feet up 23% YOY and sublease space up 53% YOY. Vacancy rate is about 8.5% YTD, an increase of 140 bps YOY. While there is short-term weakness in the market and both leasing and sales activity are down, we expect activity to increase in 2nd half of 2021. Office users will have more clarity by then and we see office tenants looking to make leasing decisions they are currently putting off. The office market will see tick up in activity as office users look to increase or decrease space depending on needs as well as many reimagining office designs for the future.
For more insights, or questions on the information in this report, please reach out to one of our AREA experts.
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