Report Cites ‘Historic’ Drop in CRE Completions

Reis, New York, reported commercial real estate completions have declined “in a historic manner” since the pandemic and shutdown orders hit the U.S.

As a result, the associated lack of new inventory is temporarily propping up market measures such as rent and vacancy, “but weakness is beginning to show,” said Reis Senior Economist Thomas LaSalvia. “Delays will persist into the near future, possibly reducing supply activity through all of 2020.”

LaSalvia noted a “fairly robust” pipeline still exists, especially for apartments, and much of that will come to market within a couple of years. “How the pandemic trends from a medical perspective will play a large role in whether the market will be able to absorb this space,” he said.

The Reis Construction Activity First Glance report said the COVID-19 pandemic and subsequent economic shutdown led to a severe reduction in completions across CRE sectors. “Delay in construction activity is a common recessionary phenomenon,” the report said. “Time to completion was delayed by approximately six months during the Great Recession. Second quarter data is showing this pattern to hold, but there is also reason to believe activity may be slower and deeper than normal.”

Typically, worries about funding, cost-saving reductions to labor and general economic malaise cause construction delays in a recession. “The current period is experiencing all three, but the effect is compounded by mandated cessation of construction for some states, as well as labor physically unable to work due to COVID symptoms,” the report said. “Further adding the potential structural changes to come regarding where and how we work, live and play; and many developers, especially in early stages, will have to rethink the worthiness of that specific project.”

The second quarter usually sees healthy CRE project completions, largely due to good weather. “[But] 2020 is running counter to the norm,” Reis said. For example, the apartment market saw fewer than 25,000 new units deliver in the quarter, down 55 percent from the previous year’s figure.

Yardi Matrix, Santa Barbara, Calif., reported apartment construction is down 12 percent year-over-year, with fewer than 285,000 new units expected to hit the market this year.

Reis said the office sector saw just 3.3 million square feet deliver, a 67 percent drop. The retail sector saw the biggest plunge, Reis reported; it only registered 0.365 million square feet of new space, which equals just 20 percent of last year’s second-quarter figure.

Other sectors are seeing some deliveries. Bloomberg reported yesterday that sector analysts expect nearly 1,000 new hotels to open in the Americas by year-end. Hotel consultant and New York University Professor Sean Hennessey told Bloomberg some hotels owners would rather open for a few paying customers than leave the building unfinished until the economy improved. “Even if it’s unsuccessful at launch, a completed project is a heck of a lot more valuable than an 80 percent completed one,” he said. “You have to jump into the fire and hope for the best.”

In addition, Hennessey told Bloomberg that all hotel development involves some degree of speculation. “Unlike an office building, where tenants come on board when you’re developing it, hotels are always built on spec–you don’t have any installed customer base until you open the doors,” he said.