Is Now a Good Time to Purchase Commercial Real Estate?
The Real Estate Select Sector SDPR Fund and Brookfield Property Partners, both significant indicators of the state of the commercial real estate market, plummeted by nearly half in the second quarter of 2020. Both funds have mostly recovered in the months since, but it will be a while before the effects of the COVID-19 pandemic have completely worn off. If you’re thinking of getting into commercial real estate, there are several factors to consider.
Government Stimulus for Commercial Real Estate
Real estate is the largest illiquid class of assets in the world, so governments on the federal and state level put a significant amount of attention into supporting the struggling sector during the height of the pandemic. By subsidizing payroll and mortgage costs, the PPP loan program kept many small businesses up and running during the worst of the economic downturn.
Dichotomy in Commercial Real Estate
According to Deloitte, growth is expected to be slow in the CRE market as a whole, but these effects won’t be felt evenly. Industrial real estate, health care, data centers, and cell towers have thrived, while offices, hotels, and retail have been hit the hardest.
Prices are showing early signs of stress across the more negatively impacted property types. For instance, US retail and office price indices declined 4.1% and 0.5% YoY in August. In contrast, industrial property index rose 7.4% YoY. Unlike the Global Financial Crisis (GFC), CRE companies had generally strong financials at the start of the pandemic and debt markets remain sufficiently liquid.
The pandemic has had a dramatic impact on the way that people live, work, and play, which has significantly changed the landscape of commercial real estate and the businesses that use those properties. As a result, commercial real estate is in an unpredictable situation right now.
A Renewed Focus on Remote Work
Just a few years ago, remote work was a niche slice of the American workplace. During the pandemic, the number of Americans working remotely skyrocketed. Many large companies that previously rented office space in major American cities have decided to transition to mostly or entirely remote work going forward. If this is a hint at a larger trend, it might drastically reduce the number of people working in commercial settings, which would, in turn, have ripple effects on food service and other facilities near urban centers.
Talk to First Western Trust
In such an unpredictable business climate, every investor’s situation will be different. Depending on the type of loan you’re looking for, the interest rates you’re able to obtain, the vertical you want to invest in, and the specific location you have your eye on, commercial real estate can still be a sound investment. Use caution, though — the next few years are likely to be a period of significant change and recovery in the American economy, and there remains significant uncertainty about what a return to “normal” might look like.