The Azucena Take: Why is Commercial Real Estate Performing so Strong?

Have you ever asked yourself why is commercial real estate so strong in 2021? When you think about it, the deck is stacked against it. The pandemic is still ongoing, there is a labor shortage, supply chains have been disrupted, and inflation has been on the rise. Yet; commercial and investment real estate is going strong.

For example, the demand for apartments was strong during the pandemic and it continues to be strong in 2021 (especially in secondary and tertiary markets). Demand for industrial and storage space has also been on the rise with vacancy rates are around 5%.

All three of these property types are in high demand while current inventory is unable to keep up. Despite the ongoing new constructions, many believe it will not be enough to keep up with demand.

Retail has been the outliner during the pandemic. Single tenants and small shopping centers located in desirable areas have been thriving. Large shopping malls have been on the decline with very few exceptions (all based on locations).

Then there are the properties that have been making a comeback in 2021. Despite some shortfalls, the rates for hotels have surpassed pre-COVID numbers while demand has been on the rise. Offices are still struggling but have seen a small recovery in 2021.

So how is this all possible when we had an economic collapse in 2020 while a pandemic is still ongoing?

During the lockdown, so many people couldn't go out while having to work from home. With expenses like eating out, gas, car maintenance, or anything related to going out being cut. This resulted in households having a vast amount of money being saved. When adjusted for inflation, the average wealth in a US household has jumped by 21.4%.

With the success of the vaccine rollout and life returning to normal, people have money to spend. Vacation destinations saw a spike in activity during the summer while hotel vacancy was at an all-time low. Retail sales were also up as consumers returned to their favorite shops and restaurants.

The overall takeaway is that the economic recovery that was predicted back in February is happening and it's ongoing. Those who invested in the right markets are seeing the rewards of their planning. There is still the risk of a recession brought on by inflation and the supply chain issue, but even that is unlikely at the moment. Regardless, a smart investor should now be prepared for the economy of 2022.