Commercial real estate in Sunbelt fared best post-pandemic: Newmark report

Jun. 27, 2021 5:17 PM ETLXP, STAG, ILPT, SKT, WSR, BRX, HIW, CUZ, OPI, APLE, HST, AHT, ARE, PLYM, PLD, MAA, IRT, CPTBy: Liz Kiesche, SA News Editor11 Comments
  • COVID-19 added a heaping dose of uncertainty into almost every commercial real estate sector in 2020, but more than a year afterward certain themes have taken shape by industry and by market, according to The Newmark Opportunity Index: Identifying Commercial Real Estate Opportunities and Challenges in Major U.S. Markets.
  • The study compares 22 major markets across economic and commercial property type metrics. On an overall basis, Nashville, Tampa, and Dallas markets rank highest across economic metrics.
  • Here's how specific property types fared:
  • Office market: Nearly every U.S. office market was challenged by the pandemic, with gateway cities hurt the most. "Three key themes have emerged surrounding office space as post-pandemic changes come into focus: the war for talent, the future of office space, and the migration of companies to new markets.
  • The markets that rank the highest in the office metrics of the index are: Tampa, Miami and Dallas. REITs with properties in some of those markets include Office Properties Income Trust (NASDAQ:OPI), Cousins Properties (NYSE:CUZ), and Highwoods Properties (NYSE:HIW).
  • One item to note, Kastle System data shows the average office occupancy of 10 U.S. cities at 32.1% for the week ended June 21, up from 31.5% the week before, with Austin at the highest level at 50.3% occupancy, followed by Dallas at 49.2%.
  • Industrial: Sales volume sped up in many markets as demand and rents for industrial space increased. For example, the pandemic fueled the acceleration of ecommerce, boosting the demand for warehouse and distribution facilities.
  • In industrial metrics, Boston, Atlanta, and Philadelphia topped the list. Prologis (NYSE:PLD) and Plymouth REIT (NYSE:PLYM) have properties in the Philadelphia and Atlanta markets; Alexandria Real Estate Equities (NYSE:ARE) has properties in the Boston area geared to scientific research and life science industries.
  • The industrial REITs with the highest Quant ratings are Industrial Logistics Properties (NASDAQ:ILPT), STAG Industrial (NYSE:STAG), and Lexington Realty Trust (NYSE:LXP) as seen in table below.
  • Multifamily: Occupancy of multifamily properties slipped during the pandemic to 95.5% in Q1 2021 from its cyclical high of 95.9% a year earlier, Newmark said, attributing the trend to some households combining amid financial pressure.
  • Rent collections, though, stayed relatively strong through the year, staying above 93% through April 2021. That may have been helped by fiscal support from the government through stimulus checks, enhanced unemployment benefits, and rental assistance programs.
  • In this sector, Atlanta, Phoenix, and Tampa rank highest. Apartment REITs with properties in these markets include Camden Property Trust (NYSE:CPT), Independence Realty Trust (NYSE:IRT), and Mid-America Apartment Communities (NYSE:MAA).
  • Hospitality is starting to see signs of life as travel starts to pick up. As of March 2021, U.S. hotel occupancy increased to 54.6%, up almost 1,600 basis points since the start of the pandemic. Hotels in mid-size Sunbelt cities outperformed those in larger coastal and gateway markets.
  • Atlanta, Phoenix, and Tampa fared the best in the hospitality sector. Ashford Hospitality (NYSE:AHT) and Apple Hospitality (NYSE:APLE) have properties in those markets, has properties in Atlanta and Phoenix.
  • The retail sector was challenged even before the pandemic, then lockdown and social distancing measures were enacted in many markets. By Q4 2020, the share of online retail rose to 14.0% from 9.6% at Q1 2018.
  • Generally, secondary and tertiary markets in the Sunbelt outperformed other regions, with Nashville, Houston, and Tampa topping Newmark's sector index.
  • Brixmor Property Group (NYSE:BRX) has properties in all three markets, Whitestone REIT (NYSE:WSR) is focused on Arizona and Texas, and Tanger Factory Outlets (NYSE:SKT) noted the Nashville market's fast growth in its REITweek presentation.
  • "While it's tempting to look at research like the index and designate certain markets as winners and losers, it's important not to lose sight of the fact that each and every metro area and asset class presents its own opportunities," said Sandy Paul, Newmark senior managing director of National Research.
  • For example, while gateway markets were hit hardest by the pandemic, they still "tend to feature growth industries like the technology sector and the most educated workforces, which should support their steady recovery and create new opportunities for investors," Paul said.
  • On a three-year timeline, industrial REITs (dark blue line) held up best since the pandemic, outpacing the S&P 500, and hotel REITs (green) lagged the most as seen in chart below. Other S&P 1500 REIT indexes on the chart are: residential (red), office (orange), and retail (magenta).
  • See Nareit's midyear outlook for REITs and commercial real estate.

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