Investors Betting on Commercial Real Estate

Published by FOX Business | May 18, 2021

U.S. commercial real-estate market is in remarkably solid shape

More than a year into the pandemic, high-rise office buildings are largely empty. About one of every two hotel rooms is unoccupied. Malls are struggling to attract shoppers.

And yet by most measures, the U.S. commercial real-estate market is in remarkably solid shape. Prices fell far less than after the 2008 financial crisis and are already rising again. The number of foreclosures barely increased. Pension funds and private-equity firms are once again spending record sums on buildings.

The market’s resilience shows how the federal government’s aggressive efforts to support the economy kept landlords from suffering steep losses. Banks have also offered delinquent property owners some slack, rather than foreclosing aggressively.

This support won’t last indefinitely, and there could be a rude awakening for investors when it starts to wane. Real-estate owners will have to contend with remote work’s threat to the office market, the dearth of business travel and the broad decline of the mall business.

But a number of big global pension funds have been raising their allocations to commercial real estate, which should bring plenty of cash into the market, and prices are already rebounding.

Between March and May last year, commercial real-estate prices fell 11%, according to commercial real-estate analytics firm Green Street. Prices since July have increased 7%, erasing more than half their pandemic declines.

That turnaround stands in sharp contrast to the 2008 financial crisis, when commercial real-estate prices in the U.S. fell 37%, Green Street said, and took years to recover.

This time around, the office, retail and lodging businesses look worse off than in 2009 in many parts of the country. But public spending has been much more robust. Wealthy people are also largely employed, but being cooped up at home led them to save more of their earnings. Much of that money went into stocks and bonds, pushing prices up and interest rates down. That has made real estate look cheap in comparison.

And with the prospect of inflation fast becoming the financial community’s biggest worry, more investors in the future could turn to commercial properties with leases that include rent increases that keep pace with inflation.

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