Wednesday, January 26, 2022

Bubble watch: Will landlord winning streak continue?

Bubble Watch explores trends that may indicate upcoming economic and/or housing problems.

Hum: Tell me about the winning hand. Last year, all 11 segments of one commercial real estate index showed growth, and 10 niches showed double-digit growth.

A source: The Green Street Commercial Property Price Index tracks the value of large, income-generating “institutional quality” properties across the country.

trend

As the economy adjusted to life in the pandemic era, a surge in commercial property purchases made it a task to separate winners and losers in the industry by studying the rate of growth in value.

It may have been a tough year for landlords in terms of operations. But property owners were rewarded, at the very least, with a rise in value – that’s an increase in the value of assets – whether the tenants were consumers or corporations.

Commercial property values ​​across all segments tracked by Green Street rose 24% last year to an all-time high – a welcome reversal from the 8% drop in the nine months of 2020 following the coronavirus outbreak.

Why? High demand for space has led to a reduction in vacancies in many real estate niches. As a result, rents skyrocketed, whether the property was inhabited by people or goods. And investors wanted to get into the game.

So, in another weird turn of the real estate pandemic era, a price rebound in 2021 saw the Green Street benchmark for all real estate rise 14% since COVID-19 hit the economy.

Newport Beach-based Buchanan Street Partners bought a new three-story, climate-controlled warehouse in Vista for $34 million. The 112,000-square-foot building in northern San Diego County includes 1,200 storage units and 50 RV parking spaces. (Courtesy of Buchanan Street Partners)

dissection

It should be noted that this was not a universal one-way road for property owners and investors?

See how the 11 commercial real estate niches monitored by Green Street are faring in relation to their price increases in 2021; how categories behaved in the harsh 2020, when the cold for business came due to the pandemic; and the overall change in value during the pandemic era.

At a minimum, these ratings are a fair summary of which properties have been in the most demand over the past two years…

No. 1 Self storage: When life is disrupted—due to a pandemic and its brief slump, for example—people find places to store their goods. This is why this niche has grown by 66% in 2021. This followed low numbers in 2020, within months of the virus’ emergence. Combined, this adds up to a 66% increase in the era of the pandemic – the number 1 out of 11.

#2 Industry: Just yesterday, everyone wanted everything, so companies also needed space to move and store goods. The value of warehouses and factories rose by 41% in 2021 after rising by 9% in a virus-free 2020. End of the pandemic era? 53% increase – #2.

Bubble watch: Will landlord winning streak continue?
Land and Houses USA acquired the 120-room Springhill Suites Anaheim Maingate hotel in Anaheim from Anaheim Resort Hotel LLC. The terms of the deal were not disclosed. Rod Apodaka of RJA Hotels brokered the deal. (Courtesy of RJA Hotels)

No. 3 Accommodation: When the quarantine ended, many people wanted to leave the city. These travel urges led to the restoration of the hotel. Prices are up 32% in 2021 after falling 25% in 2020. However, in the era of the pandemic, hotels still fell 1%, the second-worst performance as business travel remains dead.

Striptease #4: Online shopping is not for everyone and not for everything. Goods that are not normally delivered (for example, groceries); and services (medicine, beauty salon or restaurants) feed the shopping centers in the neighborhood. After early losses from the pandemic – a 13% drop – this niche has recovered to 30% growth in 2021. So in the era of the pandemic, that’s a 13% increase in value – #6.

No. 5 Apartments: People have to live somewhere. With expensive property and risky roommates, the demand for rent — and rent — was on the rise. Values ​​are up 29% in 2021 after falling 5% in 2020. Pandemic era? 22% increase – #4.

No. 6 Shopping malls: The most surprising property resurgence may be that many large shopping malls are probably more valuable dead than alive. In 2021, values ​​rose by 27% after falling by 20%. So that’s a 1% increase for the era of the pandemic – productivity #9 – for a niche that had a challenging future well before COVID-19.

Bubble watch: Will landlord winning streak continue?
The 351,200-square-foot stores at Dos Lago Mall in Corona sold for $47,375,000, according to Irvine-based NAI Capital Commercial. (Courtesy of NAI Capital Commercial)

No. 7 Separate stores: Owning the property that houses these shops in the mall’s parking lot has become a popular “clean lease” investment. The category is up 26% in 2021 after falling 7% after the coronavirus. Pandemic era? 17% increase – #5.

No. 8 Mobile home parks: Any residential property was at its peak last year, and this niche jumped 24% after rising 8%, despite disruptions due to the coronavirus in 2020. Pandemic era? Growth by 34% – third place.

No. 9 Student hostel: Going back to school (that is, on college campuses) improved the prospects for this category. Dorm prices rose 16% in 2021 after falling 6% as most students studied at home in 2020. Pandemic era? 9% increase – #7.

No. 10 Healthcare: Problems in nursing facilities have been a huge problem, but patients visiting doctors after restrictions were eased have helped the owners of medical facilities. This group’s values ​​are up 10% in 2021 after the niche’s initial drop of 5%. For the pandemic era, a 5% increase is #8.

Finally, office space: Will they or won’t they? Workers are returning to the offices, i.e. The risk of losing tenants kept gains at 6% in 2021 after losing 9% just after the virus spread. Pandemic era? Industry-worst performance with a 4% drop.

How bubbly?

On a scale from zero bubbles (no bubbles here) to five bubbles (five warnings)… FOUR BUBBLES!

We remind you that the big increase in prices occurs not only in commercial real estate. Stocks are up 40% over the same period, while US homes are up 30%. You can find some “cheap” income generating assets at the bottom of this ranking.

But more generally, are the huge profits in many commercial real estate niches a by-product of the additional demand created by the New Normal Economy? Or is it investors overreacting to temporary changes in spending, work, and delivery habits?

Also, was this mind-blowing rise largely due to a buying spree fueled by investors’ thirst for income-generating real estate? And will that appetite change dramatically as interest rates on less risky assets rise in 2022 and beyond?

Jonathan Lansner is a business writer for the Southern California newsgroup. He can be contacted at [email protected]

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