Lucian Alixandrescu 
While restrictions meant to limit the spread of COVID-19 have radically changed many aspects of our lives and drastically changed the business— commercial real estate (CRE) included — available data has not yet reflected the effects of the pandemic.
Rather, the newest national office report released by Yardi Matrix shows that, although there are signs of a slowdown in the office pipeline, lease rates held mostly steady in March. In fact, the first quarter of 2020 was actually quite strong in terms of sales. Read on for highlights from the report.
Listing Rates Decrease Marginally in March, Manhattan Holds Strong
Nationwide, average listing rates rested at $37.99 per square foot in March — down only $.26 or 0.7% from average rates in February. What’s more, this represents an increase of 20 basis points from March 2019. Vacancy was also relatively stable, dropping 0.6% from February to land at 12.8%.
But, while the effects of the coronavirus are not yet reflected in these metrics, it’s worth noting that lowering rates won’t have much of an influence due to already-low leasing activity. As a result, a more noticeable change in listing rates could occur after restrictions are lifted and people start returning to the office, according to the office report.
Manhattan real estate has already recovered from two major hurdles since the start of the century. Now, it’s showing similar resilience, even though it’s one of the areas hardest hit by the pandemic. Specifically, office space in Manhattan experienced a year-over-year growth of 14.2% — the highest in the nation — in full-service equivalent, with rates resting at $85.84.
Manhattan also led in same-store growth with 13.3%. It was followed by San Francisco with 8.3%, Seattle with 6.7% and Tampa with 6.2%. The vacancy rate in Manhattan was 7.4%, and several prominent office leases were also signed in March.
Office Report Finds Supply Not Yet Affected, Miami & Houston Pipelines Vulnerable
Nationally, 148.9 million square feet of office space is under construction and, to date, Yardi Matrix data has not recorded any project cancellations. However, while many states exempted construction from stay-at-home orders, there are some concerning signs when it comes to the office pipeline.
For example, in a weekly survey conducted by the Association of General Contractors, 19% of respondents said an owner (including a public owner regarding its own projects) had directed them “to cancel construction on a current project or one scheduled to start in the next 30 days.” Notably, this figure is up 7% from the survey conducted two weeks prior.
Nonetheless, most markets where new construction is a large percentage of total inventory have low vacancy rates and high employment growth in office-using job categories. Therefore, newly added space is likely to be in demand.
However, there are two exceptions. First, Miami’s 2.5 million square feet of office space under construction represents 3.8% of its total inventory, which is considerably more than the national average of 2.3%. But, the city has experienced just 0.9% yearly growth in office-using jobs and has a middling vacancy rate of 12%.
Along the same lines, Houston has 4.2 million square feet of inventory under construction, but the city’s vacancy rate is among the highest in the nation at 20.6%. Plus, Houston office vacancy is also vulnerable to downturns in oil prices. Consequently, projects under construction and in the planning phase both here and in Miami may be questioned.
Q1 2020 Sales Volume Nears $20B, Prices per Square Foot Spiking Before Outbreak
Before the coronavirus became a national concern, 2020 was gearing up to be a good year for real estate. Specifically, sales volume in Q1 reached just under $20 billion — on par with the first quarters of both 2019 and 2018. Unfortunately, Q2 is unlikely to be as successful because sales slowed considerably due to COVID-19.
Toward the end of 2019, average sales price per square foot spiked — a trend that continued into 2020. As a result, Q1 2020 had an overall average price and all-time high of $310 per square foot. Moreover, this spike wasn’t the result of outlying trends, as prices rose in all asset classes and locations.
Meanwhile, a wild card for upcoming sales is the IRS’s extension of the term limit for 1031 exchanges. A 1031 exchange allows an investor to sell a real estate asset without paying capital gain taxes — as long as they use the profit from the sale to buy another like-kind property.
Previously, investors had to find a replacement property within 45 days of the sale and close the purchase within 180 days. But, the IRS has extended the deadline to July 15, which means that deals that may have been rushed to fit the previous deadline can now be put on hold as investors keep an eye on the developing situation. At the same time, some investors may choose to simply sell and pay the capital gains tax in order to hold on to the money until the crisis ends. Consequently, there may be large amounts of capital ready to be invested once the situation stabilizes.
Overall, while there are some concerning signs, other indicators seem promising. As the industry adapts to the situation, we’ll have to wait to see the full influence of COVID-19 on employment, commercial real estate investment and office deliveries.
Methodology
The report covers office buildings greater than 50,000 square feet in surface.
Yardi Matrix uses aggregated and anonymized expense data to create full-service equivalent rates from triple-net and modified gross listings.
Yardi Matrix collects listing rate and occupancy data using proprietary methods. Sales volume and price-per-square-foot calculations do not always include portfolio transactions or those with unpublished dollar values.
