Are you thinking of bringing your Monopoly skills to the real world?
Maybe you’ve already started and have one or more single-family homes in your portfolio? But now you’re thinking of making the transition, like many other residential-turned-commercial owners.
Perhaps you’re seeking a hedge against the economy, or a high yielding source of income with stable cash flows from long-term tenants? These are all potential benefits of commercial properties.
However, before you launch into buying that shopping plaza you’ve been driving by every day for 10 years, keep in mind that purchasing retail, multifamily, industrial, and office property requires skill and patience, lots and lots of patience. So don’t worry if you don’t find a solid prospect quickly.
In the interim, you can add these commercial real estate statistics to your knowledge base.
Note: Investing in commercial real estate generally tends to require more capital, sophistication, and regulation versus residential real estate.
Let’s start with a few key stats:
- US commercial property price growth is at 9.8%
- $1.02 trillion is the market size of U.S. commercial real estate
- Industrial rents projected to grow at an annual pace of from 3.1% to 3.7%
- Office vacancy decreased to 12.4% from a high of 16.4% in Q1 2021
What is commercial real estate?
You’re certainly familiar with single-family homes, perhaps you own one. Unfortunately, even if you do, you can’t call yourself an owner of commercial real estate (CRE).
Because commercial real estate are asset classes that are used exclusively for business related purposes or working spaces, versus serving as living spaces. Contrast that with their counterparts, residential real estate, is what your single family home is, and what you use as your living quarters.
You lease commercial real estate out to tenants who use the space to conduct income-generating activities. And it’s a pretty diverse category of real estate too, encompassing everything from the building your local grocery store occupies, to a giant slot-machine filled Vegas hotel/casino.
Here are some commercial real estate categories for a quick rundown:
- retailers (all sorts)
- hospitals and healthcare facilities
- strip malls
- movie theaters
- resorts & hotels
- office space.
If you’re looking for a simple definition of commercial real estate: Think of it as properties that are used specifically for business or income-generating activities/purposes. Whose four main categories are: retail, office space, industrial, and multifamily rentals.
How to invest in commercial real estate?
Though very much different than the stock market, investing in commercial real estate still entails similar investment risks and strategies. You don’t just wake up one morning and decide to buy a hotel, or strip mall, without doing some due diligence and risk analysis. Well, at least you shouldn’t!
And especially unlike stocks, commercial real estate assets are of an illiquid nature. Thus, expect your money to be tied up in the asset for an extended period of time. It’s a lot harder to sell an office building, a hotel, a mall, a storage facility, or an apartment building than it is to sell a stock.
Now, if you’re still committed to potentially investing for the long term and are looking to pursue commercial real estate as an investment, start by asking yourself the following questions.
Do I want to invest through crowdfunding or in a single property?
Investing in commercial real estate through crowdfunding is a relatively recent option. And it essentially allows individual investors to pull their money together to invest in real estate that was historically inaccessible to them. Think of investments such as a sky scraper in New York City.
There are many real estate crowdfunding platforms out there, and if you opt for this route, be sure you’re working with one that has a solid track record. Some of the top ones include: Fundrise, CrowdStreet, PeerStreet, RealtyMogul, EquityMultiple, DiversityFund, and YieldStreet.
But if you choose to start with a single commercial property, it’s worth noting that well over 90% of commercial real estate investors get their start with single-family rentals, aka residential real estate. This approach allows them to accumulate knowledge and experience, as well as wealth, and finally make the transition into the commercial world at some point.
If you’re keen to skip all that and jump straight into the commercial world, seek to identify unique characteristics in a prospective commercial real estate property that either aren’t being utilized properly or capitalized on, and simulate what would happen if you made the improvements. Conversely, if the unique characteristics are of an adverse nature, it may be best to keep looking.
Investing in Real Estate through REITs and ETFs
You have another option of indirectly investing in commercial real estate, through ownership of marker securities such as Real Estate Investment Trusts and Exchange Traded Funds. To do so, select ones that invest in commercial property-related equities.
Yet another way of indirectly investing in commercial properties is by buying stocks of companies that cater to the commercial real estate market, realtors and bankers for example.
Interesting commercial real estate statistics and trends
Here are some stats and trends on the current state of the commercial real estate industry in the United States. As you’ll see the industry is slowly crawling out of an unprecedented period.
Commercial real estate pricing
1. At 9.8% the US commercial property price growth keeps moving higher in 2021, led by apartments
(Source: Real Capital Analytics, NAR Research Group)
The US National All-Property Index, the metric used to gauge commercial property pricing in the United States, experienced the most rapid annual growth rate since 2015. Led by the Apartment sector, the index grew 9.8% from June of last year (2020), and was up 0.8% from May.
Having dipped as low as 6.9% during the 2020 pandemic, the Apartment sector price growth has since rebounded to 12%. But the deal activity for apartments didn’t just recover, the Q2 2021 numbers exceeded any previous second quarter period and set a record high.
Rising 9.8% from June 2020 to 2021, the industrial property pricing has experienced rising demand but continues to stay in the 9% to 10% range seen since the crisis starter.
Clocking in it’s best performance since 2018, the office sector index gained 6% versus same time last year. With suburban office prices leading the way at a 7.7% year-over-year growth. However, Central Business District (CBD) office prices are still on the decline, at a rate of 2.4% annually. Will this change once Big Tech and other giants bring employees back to the office?
Though retail prices rose at an accelerating pace of 3.2% versus same time last year, compared to recent quarter growth in this sector, the pace is still below the U.S. economy’s overall pace of inflation.
Commercial real estate dollar volume
2. Q1 2021 commercial sales transactions over $2.5 mill decreased -28% from Q1 2020
(Source: NAR Research Group)
According to industry data combined with the National Association of Realtors commercial members who answered the NAR’s 2021 Q1 Commercial Real Estate Quarterly Market Survey, the commercial real estate market is experiencing a recovery, but still remains weak compared to pre-COVID times.
Commercial real estate transactions under $2.5 million
Transactions declined 1%, according to the NAR’s survey respondents in the small CRE market, whose property or portfolio acquisitions were typically under $2.5 million.
Contributing to the decline were all types of commercial real estate, with the exception of industrial properties and all types of land, which actually saw an increase in sales.
Commercial real estate transactions over $2.5 million
In Q1 2021, large commercial real estate acquisitions fell 28% year-over-year. With transaction declining across the board, except for hotel properties, which actually experienced a rise of 13% in acquisitions.
One explanation for the disparity is that investors could be scooping up the pandemic stricken hotels and converting them into multifamily housing instead.
Top 12 cities for commercial transaction of $2.5M or over closed in 2021 Q1, in billions:
|City||Commercial Transactions (billions)|
|North New Jersey||$2.2|
Year-Over-Year Change in $2.5+ million transactions by sector for Q1 2021:
|Sector||Volume (billions)||Year Over Year|
|Senior Housing & Care||$3.3||-8%|
Prices continue to trend upwards, but the overall value of the U.S. commercial real estate market is still down by 6% versus same time last year. Commercial members of the NAR predict an uneven recovery in the year ahead, predicting land sales to increase 5%, industrial warehouse 3%, and class B/C apartments to gain 1%. However, they foresee a decline in retail, office, and hotel/hospitality.
Commercial real estate revenue
3. $1.02 trillion is the U.S. commercial real estate market size in 2021
(Source: IBIS World)
As if it wasn’t evident to anyone who made it through the craziness of 2020, the COVID-19 pandemic had a significant impact on the US commercial real estate industry revenue.
In fact, the market size took an estimated nosedive of 15% (down to $986.3 billion) in 2020, primarily due to the hefty decline in corporate profit as well as private nonresidential construction activity. It is the first down year since 2011, as the market size was on a near 10 year upward trend.
Though the market size is expected to increase by 3.8% in 2021, on average it has declined by 0.5% per year between 2016-2021. But 2020 was certainly a unique year that helped bring the average down. In fact according to IBIS world the market was at it’s highest in 2019 at $1.15 trillion.
Demand for commercial real estate
4. At 6% projected price growth for the next 12 months, land is expected to be most in demand
(Source: NAR Research Group)
Expected change in commercial prices in the next 12 months:
|Property Type||Expected Change in Prices|
|Apartments Class B/C||5%|
|Apartments Class A||4%|
|Office Class B/C||-1%|
|Retail: Strip Center||-1%|
|Office Class A||-2%|
Things seem to be getting back on track in 2021, and there is once again a positive outlook for the US economy going into 2022. In fact, an imminent rising economy is one of the most crucial elements driving the projected growth in demand for various commercial real estate sub-sectors.
However, one sub-sector that is still up in the air is offices. Will corporation follow through on the whole ‘permanent work from home’ pitch? And will they even follow through on the ‘hybrid remote work’ model that is so commonly discussed these days?
Or will bringing back workers to the office starting late 2021 and early 2022 finally reignite occupancy and begin to stabilize rents? It’s hard to say what will happen long term, as this is unlike anything our modern we’ve experienced before.
On the other hand, NAR commercial members are expecting a lot more land sales going forward, as well as industrial properties. As e-commerce continues to expand so too does the need for more storage and fulfillment centers for inventory management.
Vacancy rates for commercial real estate
5. Office vacancy decreased to 12.4% from a high of 16.4% in Q1 2021
(Source: Lee & Associates, Statista)
According to Statista, office sector vacancy rates rose to an average of 16.4% in Q1 2021, a 13% jump from Q1 of 2020. However, according to Lee & Associates Q2 2021 Commercial Real Estate Market Report for North America, they have since dropped down to a 12.4% index for the US.
Moody’s Analytics believes the high vacancy rates will continue to persist going into 2022, which naturally leads many to believe that the office sector will suffer the most throughout 2021.
However, industrial real estate stands to benefit the most as it rides the e-commerce expansion wave and a robust economic outlook for the near future. But what about retail and multifamily sectors? Let’s take a look at each commercial real estate sector individually to find out.
U.S. Office Vacancy Rates in 2021
Areas with over 100,000 sq.ft and lowest office vacancy rates:
U.S. average is 12.4%.
|St. Louis, MO||8.2%|
Facebook and other tech companies are experimenting with letting employees work remotely permanently. Others are offering a hybrid approach and calling it office-remote flexibility. Still, others like Goldman Sachs are asking their employees to return to the office.
Has pandemic induced remote work permanently changed how Big Corps use their office space?
Since the 2020 pandemic started, an estimated 800,000 office jobs were lost. Now, though some models forecast the recovering of these jobs by early 2022, what the relationship between space requirements and job growth will be is uncertain. Will we ever go back to pre-pandemic times?
Tough to say, but in the mean time, here is where we stand with current vacancy rates.
U.S. Industrial Vacancy Rates in 2021
Areas with the lowest industrial vacancy rates:
US average is 5.1%.
|San Luis Obispo, CA||1.9%|
|Los Angeles, CA||2.3%|
|Inland Empire, CA||2.8%|
|Orange County, CA||2.8%|
|Northern New Jersey, NJ||3.5%|
The industrial industry market is breaking all sorts of records as of late. For example, net absorptions saw a record Q2 2021 with 134.7 million square feet, which was just shy for the net absorption figure for all of 2020; and record mid-year tenant growth totaled 208.7 million square feet. Low vacancies and strong demand is propelling industrial real estate as a top performer.
U.S. Retail Vacancy Rates in 2021
Areas with over 50,000 sq.ft and lowest retail vacancy rates:
U.S. average is 5.0%.
Vaccines are turning out to be a ‘shot in the arm’ for the retail sector. People are more comfortable and happy to frequent restaurants, bars, and shopping malls with higher capacities again.
Yet, even as retailers expanded their square footage footprint in the second quarter of 2021, the most since Q3 2018, challenges from the e-commerce world, as well as the sectors complexity, overshadowed the growth. And though many are working on ways to bring their own offerings online expediently, so too are many committed to improving their physical presences .
Among those with the highest retail vacancy rates are Phoenix, AZ (7.6%), Chicago, IL (6.1%), Dallas-Fort Worth, TX (6.1%) and Harrisburg, PA (6.1%).
U.S. Multifamily Vacancy Rates in 2021
Areas with over 100,000 inventory units and lowest multifamily vacancy rates:
U.S. average is 5.3%.
|Inland Empire, CA||1.9%|
|Orange County, CA||2.8%|
|San Diego, CA||3.3%|
|New York, NY||3.3%|
|Northern New Jersey, NJ||4.0%|
The U.S. multifamily market is trucking right along, posting its second straight quarterly record for net absorption. As well as exhibiting strong rent growth in every major metro, suburb, and downtown are nationwide. For example, net absorption for the first half of 2021 was 417,736 units, which is more than the total for any prior year in the last decade.
Demand outpaced new supply, and multifamily deal volume gained 6.4% year-over-year growth as investors regained their confidence. Tampa, FL saw a 21.2% jump in effective rents in the last 12 months, and rents rose nationwide nearly 7%, with over a dozen major metros recording double digit growth.
Apartments are getting bigger as more people are working remotely and seeking more space. Aging millennials are reaching typical home-buying age but many are unable to afford the sky-high real estate prices, thus turning to larger apartment as an alternative.
Rent growth for commercial real estate
6. Industrial rents projected to grow at an annual pace of from 3.1% to 3.7% for the next three years.
(Source: Lee & Associates)
Though most markets are projected to experience a deceleration in rent growth, industrial real estate rents are poised to grow between 3.1% to 3.7% per annum overall for the next 3 years.
Furthermore, southern markets like Orlando (expected to be the national leader at 5.2% per year), Miami, Ft. Lauderdale, and Jacksonville are expected to experience accelerated growth instead of a deceleration.
On the other hand, apartment rents are making a turnaround since their 3% decline in 2020, and effective rents are projected to grow by 2.1% in 2021. Furthermore, they are projected to regain their pre-pandemic levels by the following year.
Additionally, it seems as if the rock bottom has been reached in heavily populated areas such as New York and the Bay area, and all else being equal their multifamily markets are expected to experience a steady recovery going forward.
As for retail rents, they’re expected to plunge another 6.8% in 2021 as e-commerce continues to to act as a disrupting force for traditional brick-and-mortar retailers nationwide,
What impact did COVID-19 have on commercial real estate?
Indeed, the COVID-19 pandemic of 2020 had a significant impact on the U.S. commercial real estate market. Countries across the globe locked down their economies, rendering commerce a big blow!
As reported by the National Association of Realtors’ “Commercial Real Estate Trends & Outlook January 2021 Quarterly Market Survey”, it was quite the turbulent period with significant changes.
Below are some of the more notable findings expressed by NAR’s survey respondents in Q4 of 2020, comparing the damage to that of pre-pandemic figures:
(Source: NAR Research Group)
7. 59% of respondents with office, retail, or industrial properties said they had to deal with missed, late, or partial rent payments in Q4 2020, a jump of 5% from Q3.
8. 63% of respondents with multifamily residential space said they saw a rise in missed, late, or partial rents in Q4 2020, a jump of 10% from Q3.
9. Tenants receiving rent concessions stayed the same from Q3 to Q4, as 65% of respondents stating they saw an increase.
10. 46% of respondents said they saw an increase in suburban area leasing transactions compared to Central Business Districts (CBDs) in Q4, up 3%.
11. 48% of respondents saw a rise in demand from gig workers for co-working/flexible office space, a decrease of 3% from Q3 2020.
12. Enterprise clients and firms drove demand for flexible/co-working office space as well. With 39% of NAR commercial member respondents reporting as much, a decrease of 4% from Q3.
13. 69% of respondents said they saw more companies downsizing, essentially moving into or leasing less square footage due to their workforce working from home. An uptick of 7% from Q3.
14. 63% of NAR commercial members surveyed expressed seeing a rise in short-term office leases, an uptick of 4% versus Q3.
15. 63% of NAR commercial members surveyed said they saw companies finding new use cases for vacant malls, a slight uptick of 1% versus Q3.
With more than half of property owners, from various commercial real estate sectors surveyed by National Association of Realtors, saying they had problems collecting rent during the pandemic, one can see just how dire the circumstances were.
In an attempt to slow the spread of the coronavirus, governments implemented full shutdowns and/or gathering capacity limits. You don’t have to think too hard to see how such an environment can bankrupt a commercial real estate company, particularly in the foot traffic dependent retail industry.
Additionally, the pandemic converted peoples homes into their offices, and the office sector essentially became a ghost town. Companies sought to re-negotiate their leases, downsize their square footage, and do what they can to stay afloat.
Those who struggled with working from home (or just going stir crazy) sought out co-working spaces, which had an impact on demand for such establishments. It was, and continues to be, a wild ride that came out of left field and imposed itself on all.
Note on the numbers used in the article: In an effort to paint a fuller picture, the figures in this article were aggregated from numerous credible sources, who reported the results of their surveys at various points in time.
Use these statistics on the commercial real estate industry in the U.S. to better gauge it’s current state, it’s future path, and what sectors are expecting to see accelerated growth versus declines.
Just as annuities can help you ensure you don’t outlive your income, so too can commercial real estate serve as a high yielding source of income with stable cash flows in retirement, albeit with additional risk.
Once you’ve made your fortune and bough all the properties on the Monopoly board, don’t let all your hard work go to waste! Sit down with a financial professional specializing in estate planning and instruct what will happen to your fortune should something happen to you.
Sound too boring? Have a look at these estate planning statistics that will persuade you otherwise.
Real Capital Analytics | NAR Research Group: Commercial Real Estate Trends & Outlook 2021 | IBIS World: Commercial Real Estate Industry in the US | Statista: U.S. Office Vacancy Rates 2021 | Lee & Associates: Q2 2021 Commercial Real Estate Report