There's an old joke in real estate that when someone asks, "How's the market?" the reply is always "Which one?" Commercial real estate varies not just by region and submarket but by individual property type. A recent report from data provider Reonomy looks at the past history of a variety of regions to get a glimpse of what the future might hold. The report looks at the historical performance of metropolitan statistical areas (MSAs) in the United States.
The most recent recession is one that lingers in and haunts our collective subconscious, but it was unlike other recessions in that it had an extremely slow recovery period. In fact, it took around five years for the commercial property market to return to pre-recession levels.
What goes up must come down, but not at the same time
While all regions saw an uptick in values over the past decade, the percentage of increase varies greatly depending on the area. The Reonomy report breaks down the United States into 5 different categories:
- Stalwarts: The five largest MSAs by population for the prior 50 years -- Chicago, Los Angeles, New York, Philadelphia, and Washington, D.C.
- Departures: Large population centers, which have seen a population decline.
- Arrivals: Large population centers that are seeing a population increase.
- Steady: Large population centers that are maintaining their rankings.
- Rural: All other MSAs.
Five of what Reonomy terms the Arrival MSAs (places that people and businesses are moving to) are located in the South. The South was hit hard during the last downturn, but since the Great Recession, median prices have bounced back strongly and are currently around 40% higher than they were during the last peak. The question is, will they be first to go down?
The West had a similar tale of expansion. Since 2011, the median price is up by 96% partly because it dropped so dramatically during the Great Recession. These major swings are much greater than those of the other regions and above the long-term trend of year-over-year median price changes moving in a downward trajectory.
The Departure MSAs, mostly located in the Midwest, are areas that have seen slower appreciation and much less market activity. The upside here is that they may not see as much of a rapid decline as the more volatile markets, which have had major upswings in value.
Variations by sector and type
While multifamily and industrial real estate have dominated in many markets, Reonomy's research shows that different property types can have varying returns in certain markets. For example, retail performed well across the Arrival and Steady markets, while office real estate saw greater appreciation in Rural and Steady markets.
Historically, these sectors are definitely not created equal. Industrial real estate, office real estate, farm and land, and retail all saw transactions drop in three out of the past seven recessions. Multifamily transactions decreased in four out of seven but saw the smallest decline across all property types. Hospitality real estate fell in five out of seven recessions and experienced a 22.9% decline when it did, the largest of any property type.
While past indicators don't predict the future, it seems likely that this current economic climate will also hit the hospitality sector particularly hard. In other downturns, retail has been less impacted, but due to the particular nature of the COVID-19 outbreak combined with the gradual move toward e-commerce, the picture is likely to be different this time.
Another factor is the role of lenders. During the savings and loan crisis of 1990 to 1991 as well as the Great Recession, lenders were under a great deal of pressure, which had a negative effect on the rate of commercial real estate transactions. The current crisis hit at a time when interest rates were already quite low.
The great unknowns
The word "unprecedented" has become overused in recent weeks, but never has the United States economy been driven to a full stop before. Looking at past recessions can only give us a glimpse of what could occur. While the hope is for a rapid recovery, the overall picture is far more nuanced, and as stay-at-home orders get extended in many urban areas, the potential for a more gradual return to normalcy seems likely.