The Azucena Take: Performance of Commercial Real Estate in Q2 2021

As we begin Q3, let’s look back at how the commercial real estate market performed in the previous quarter. There are no surprises or shortcomings, most types of property performed either at or above expectations. Overall, investors are seeing the rewards of their patience and planning.

Here is a breakdown of how each type of commercial property performed during Q2 2021:

Apartments: To say it was a good quarter for the apartment market would be an understatement. With the housing shortage and the migration to secondary/tertiary markets, this was one of the best years since the peak of the Dot Com boom of the ’90s. Net absorption rate was at 218K while rent growth was at 4.1% and vacancy rates were at 3.8%.

Many experts believe that the housing shortage will not be alleviated for another few years, thus making renting still the only alternative.

Industrial: This was one of the few property types that were hardly impacted by the pandemic and whatever value was lost has been quickly gained. Vacancy rates were at 5.0% while net absorption rate was at 102 million as 325 million new square feet is expected to enter the market. Currently, this is being driven by eCommerce business while many are expected to see even more demand closer to the holiday season.

Retail: Many businesses shuttered during the pandemic but there was not the surge of vacancy’s that many feared. While vacancy went up in 2020, it came nowhere close to the numbers we saw during the 2008 crash. Vacancy rates are currently at 5.6% while most vacant retail spaces are being converted into mixed-use spaces. Meanwhile, the average rent for retail space has gone up by 1.4%.

Office: Everyone expected the office market to perform below expectations and while the results were soft, the gains were a surprise to many. Net absorption rate was at +1.4 million (the first gain since the pandemic) but the vacancy rate is still at 16.3%.

However, do not go all-in with office spaces as there are still too many unanswered questions and uncertainties. Most of these should be resolved sometime around mid-2022 at the latest.

While the worst of the pandemic is behind us, there are other factors to look out for that could cause a disruption. Overall, investors should expect an even stronger Q3 2021 while those who missed out should start planning now.