As part of their first-ever Forecast Summit for Commercial Real Estate, the National Association of Realtors have unveiled the top 10 leading commercial real estate markets for 2021.
These US cities have been selected after careful consideration of 25 key indicators regarding the area’s demographic, economic, housing and commercial market conditions within the office, multifamily, retail, hotel and industrial property sectors. Some of the indicators analyzed included, among other variables:
- Unemployment rate
- GDP growth
- Consumer spending
- Median household income
- Population growth
- Rental vacancy rate
- Homeownership rate
- Building permits
- Apartment rent
The summit featured leading economists who discussed the impact that the pandemic has had on commercial real estate, including the office, multifamily, industrial and retail sectors, as well as real estate investment trusts (REITs).
“The top commercial real estate markets that are expected to outperform the rest of the nation are generally affordable and able to draw new residents with a greater flexibility to work from home,” said Lawrence Yun, NAR’s Chief Economist. “These growing markets also offer much lower office and retail rents and are, therefore, able to attract new and expanding businesses.”
The Top Ten Commercial Real Estate Markets for 2021 are:
- Austin – Round Rock, Texas
- Cape Coral – Fort Myers, Florida
- Charleston – North Charleston, South Carolina
- Las Vegas – Henderson – Paradise, Nevada
- Nashville – Davidson – Murfreesboro – Franklin, Tennessee
- Phoenix – Mesa – Scottsdale, Arizona
- Raleigh, North Carolina
- Salt Lake City, Utah
- Seattle – Tacoma – Bellevue, Washington
- Tucson, Arizona
Yun went on to predict that the U.S. economy, along with the commercial real estate market, will continue to improve in 2021.
“The recovering economy and the near-certain job growth will steadily lead to the absorption of commercial properties,” he said. “The apartment rentals market could once again experience very low vacancy rates by year’s end.”
NAR’s director of housing and commercial research, Gay Cororaton, anticipates that the industrial, multifamily and retail sectors will lead the recovery of commercial real estate in 2021, but says that it may very well take longer for occupancies in the office sector to reach pre-Coronavirus levels.
“Multifamily and industrial remain the commercial market’s bright spots,” said Cororaton. “With wide differences in commercial and apartment rents across metro areas, development will turn to less expensive markets that are closer to the gateway cities.”
Commercial Real Estate Predictions for 2021
A global pandemic certainly keeps real estate forecasters on their toes. Whilst it’s natural to err on the side of caution, however, history tells us that, following times of struggle, there is usually a time of great expansion as the economy recovers.
Here are some of the most impactful trends to expect in the commercial real estate sector for 2021.
Work From Home Trends Will Continue
CoStar Group reported that, in the second and third quarters of 2020, a record 42 million square feet of office space was listed on the market by corporate tenants. Whilst working from home has its challenges, we’ve had no choice but to find ways to adapt, with many larger organizations shrinking their footprints to save on costs. It will take time for this transition to noticeably revert back to anywhere close to pre-pandemic norms.
Interest Rates Will Remain Low
Monetary policy is highly likely to remain accommodative to economic recovery, with the Federal Reserve maintaining low short-term interest rates throughout the year. These deliberate actions should result in favorable conditions for continued economic recovery and commercial borrowers alike.
Major City Populations Will Continue to Decline
Population numbers in major cities such as New York, Chicago, Los Angeles and San Francisco will continue to fall, with people flocking to smaller cities that offer lower costs of living, improved lifestyle quality and better weather. Even before the pandemic, big cities were becoming too expensive for many, with rental prices far exceeding the affordability of middle-income Americans. Public health shutdowns and ongoing work-from-home policies have driven this exodus from major metropolitan areas even further.
Sustainability Focus Will Continue to Grow
According to the International Energy Agency (IEA), a whopping $240 billion was spent on energy efficiency within the buildings, industry and transport sectors in 2019 and this trend is expected to intensify throughout 2021. Covid-19 has reinvigorated our drive to prioritize sustainability, propelling 2021 as a year of sustainable finance and green recovery, and Biden’s victory will only further support this momentum.
The pandemic’s impact on commercial real estate has varied widely across the different property types, with REIT’s showing resilience on account of their liquidity and solid fundamentals of operation. Some sectors were much harder hit, like resorts, lodgings and REIT’s in retail, whilst the areas supporting the digital economy – such as cell towers, data centers and logistics facilities – have experienced a surge in demand.
Retailer fallout is expected to continue, but as tactical bankruptcies and store closures continue, conversions and adaptive re-use options will create new opportunities for developers and investors, especially in the strong commercial markets identified by the NAR.