Coronavirus Undermines CRE Market Momentum in Preliminary Q1 Data

Boxwood Means, Stamford Conn., said fallout from the coronavirus pandemic is becoming apparent in commercial real estate market fundamentals.

In his blog (, Boxwood Means Principal and Co-Founder Randy Fuchs said first quarter data showed early signs of a broad deterioration in market conditions.

“As sure as thunder follows lightning, CRE participants have been anticipating the fallout of the COVID-19 pandemic on market fundamentals in light of the severe disruptions imposed on the nation’s commerce and business,” Fuchs said. “At the neighborhood level, the pandemic’s impact is self-evident: retail stores are shuttered; new construction projects are sidelined; and non-essential service-related businesses have been idled. This unprecedented economic stagnation, or worse, imminent recession has caused the unemployment rolls to skyrocket leaving CRE participants bracing for the derivative effect.”

Boxwood Means analyzed first quarter CRE data from CoStar, Washington, D.C. Fuchs said early results show that, after a CRE market expansion lasting 10 years, “the day of reckoning is likely upon us. “

“Though the market has yet to hit an inflection point, weakness in key metrics has emerged,” Fuchs said. “We find that a sizable proportion of the apparent softness in vacancies, rents and net absorption across these commercial sectors can be attributed to recent QTD movements rather than seasonal fluctuation.”

For example, nearly 38% of the one-year, 47-basis point increase in the national industrial vacancy rate (averaging 5.4%) aligns with the current quarter. Similarly, QTD changes accounted for 46% of the 89 bps year over year decline in annual industrial market rent growth (5.0%). On the other hand, QTD industrial demand has remained steady versus Q4 at 151.6 million square feet, though it’s down a notable 30% year over year in absolute terms as expansion requirements by industrial users–with the sustained exception of large warehouses supporting e-commerce–have slackened.

Fuchs noted early impact as well in office, with the national office vacancy rate ticking up by 9 basis points in the first quarter alone. “Moreover, in wake of the recent and massive shift to office staff working from home, it follows that landlords would lose the upper hand on office rents,” Fuchs said. “Annual rent growth (2.4%) has shrunk by 82 bps year over year with 73% of this loss attributed to the QTD.”

Fuchs also said, unsurprisingly, the retail sector’s movements are somewhat weaker than other property types. Most (73%) of the sector’s modest 15 basis point increase year over year in national vacancies presently averaging 4.7% has taken place in the QTD. Retail rents, too, are similarly under pressure: Though annual rental growth increased 29 bps over 12 months, QTD rent growth ominously dipped 22 bps compared with Q4 to 2.5% annually. Furthermore, retail demand is decelerating at an increasing pace.

“Granted, these preliminary Q1 figures represent a walk and not a stampede to the exit doors,” Fuchs said. “Unfortunately, the coronavirus’ impact on the economy and CRE is only getting started.”