CRE Fundamentals Struggle to Find Secure Footing

Challenging times for CRE fundamentals are likely to extend into 2021, but there is light at the end of the tunnel, said Wells Fargo Securities, Charlotte, N.C.

The Wells Fargo Securities Chartbook reported apartment, retail and office rents all declined on a quarter-over-quarter basis between July and September. “This is the first time these property types have seen rent growth in negative territory since the Great Recession,” the report said.

By contrast, industrial rents increased slightly, reflecting stronger leasing activity as e-commerce businesses, retailers and logistics firms pursue warehouses facilities to accommodate the ongoing shift toward online shopping, Wells Fargo Securities said.

The report noted industrial prices again outperformed all other property types while retail prices fell more than any other category. Suburban office valuations slipped while central business district office prices improved 3.5 percent on a year-over-year basis.

“The resiliency of CBD office prices lends credence to our view that the office will remain the predominant location for office-using industries, even if some workers continue to work remotely post-COVID,” the report said.

Wells Fargo Securities called apartment valuations “more buoyant than expected.” Valuations are 7.2 percent above year-ago levels. But the report noted significant regional disparity. “Fast-growing apartment markets which have seen robust job and population growth over the past decade are generally outperforming the dense and less affordable global gateway markets,” it said. For example, apartment asset prices in Tampa, Phoenix and Nashville are up more than 10 percent this year, while other cities have seen price slumps.

“The overall resiliency of property prices should allay fears that plunging valuations could potentially ripple through the entire commercial real estate industry and leave property owners, investors and lenders all worse for the wear,” the report said. “One caveat, however, is that current pricing is still clouded by the substantial drop-off in sales. The future income potential of many CRE properties is still in question, which is contributing to the widening gap between sellers’ and buyers’ perceptions of property values.”

Commercial real estate should benefit from several effective vaccines set to roll out in coming months, especially the hotel and retail sectors, the report said, noting “both will take some time to mend, however.”