Up, down, all around. This past year has been a doozy for real estate investors. Some markets plummeted and others soared. Commercial real estate (CRE) has been no exception. The National Association of Realtors (NAR) April 2021 commercial real estate trends and outlook report found that hotels are up year over year but other commercial properties, like office space, are staying depressed. When real estate markets stray from the norm, personal opinions and predictions become rampant. It has led some professionals to question whether speculation is driving up real estate prices or if there are other influences at work.
What was anticipated
When the worldwide pandemic forcibly closed businesses, it caused many restaurants and retail stores to go out of business. Many did not have the savings to float their lease payments or mortgages until things started to reopen. A research paper from the Proceedings of the National Academy of Sciences found that the median business with more than $10,000 in monthly expenses only had two weeks cash on hand.
Regardless of the why, businesses closed and no one was quite sure when things would start to return to normal. This would conceivably increase the CRE supply while tenant and owner demand was lower than normal. Many realtors and business owners predicted that the CRE market would see depressed sales transactions and lower sales prices due to less demand and an uncertain economy.
The actual impact of COVID-19 on closures
Headlines were screaming about rampant business closures, the likes of which we had never seen at this scale. But a market analysis from the Federal Reserve compared closures to historical averages to determine the actual impact that COVID-19 had above and beyond the norm. While these numbers were elevated, they concluded that roughly 200,000 businesses were closed above the average. It was not equal across the board though. Restaurants were harder hit than outdoor activities, for example. The hardest-hit sector was "other services," a category that includes businesses like barber shops and nail salons -- which saw 100,000 businesses permanently close.
Is speculation really driving prices?
Many bigger businesses with a solid balance sheet were standing on the sidelines waiting for the opportunity to scoop up real estate for pennies on the dollar, but many aren't finding the deals they were expecting. CEO Gene Lee of Darden Restaurants said that "tremendous speculation in the real estate market is driving prices" -- although that hasn't stopped them from opening 14 new restaurants in 2021, with another 35-40 planned for 2022.
While there still is a lot of uncertainty in the market, the general outlook for the future of CRE is optimistic, meaning other established retailers are doing the same thing, which in turn may be driving prices. Many pension funds have upped their proportion of CRE recently, which further pushes the prices up, but with rising inflation, putting money to work is more critical than ever.
Is it speculation? Maybe. But I would ask -- Isn't all investing speculation to some degree? We gather what facts we can, look at potential market influences as we are able, then make a personal prediction that we can act on. Investors and businesses have made their best guess, and now we're seeing the impact of those actions.