Real Estate Market Conditions (October 2020)

November 4, 2020

Below are our brief observations on real estate market conditions. An overview of current market conditions is available by completing the form below.

REAL ESTATE CAPITAL MARKETS

  • Transaction Activity.
    • Q3 US transaction activity totaled $61.3B, down 60% from 2019 with hotels suffering the steepest decline (neg. 84%) and industrial the least (neg. 28%)
    • European transaction activity was slightly more robust, down 43% from 2019, with industrial volumes similarly robust, down only 9% over the prior year
    • With volumes down, several large transactions were announced in niche sectors that are expected to demonstrate relative strength, including self-storage, production studios, and life sciences
  • Capital Raising. Competition for capital is becoming intense as global Q3 fundraising was $21B, down from $45B in Q2 and from $52B in the same quarter last year, while the number of funds in the market is 1,013, compared to 400-650 over the past five years
  • US REIT index is down approximately 14.4% YTD versus the S&P, which is up 1.2%. Malls and hotels are the most impacted at neg. 58.7% and 69.6%, respectively, while multifamily and office REITs have not been spared, down 44.3% and 44.8%, respectively
  • Logistics (+6%), data centers (+20%) and homebuilders (+17%) are the only sectors that are up YTD
  • Debt Spreads. At 93 bps, AAA CMBS spreads are currently 18 bps wide of pre-COVID-19 levels while BBB- spreads are 228 bps wide
  • Base rates have crept up over the past month, with US10Y now trading at 0.87%, up from 0.65% at the beginning of October and 0.39% amid the initial COVID-19 panic in March

REAL ESTATE OPERATING ENVIRONMENT

  • Multifamily. NMHC reported rent collections improved in October, with 95% of renters paying versus 92% by the same period in September
  • While suburbs and secondary market multifamily is holding up well, fundamentals in dense and high-cost coastal markets such as NYC and San Francisco have plummeted
  • Retail. Two public US mall owners filed for bankruptcy protection over the same weekend as store closures and reduced traffic put pressure on a sector that was already strained pre-COVID-19
  • Office. REIS’ reported office vacancy ticked up approximately 60 bps to 17.4% in Q3 as absorption turned negative and C&W reported a 22% increase in sublet space over the first half of 2020, led by San Francisco (46%), San Mateo (34%), Manhattan (26%) and Austin (25%)
  • Industrial. E-commerce, which has reached 21% penetration in the US (up from 15% in 2019), continues to be the primary demand driver fueling occupier and investor demand for logistics properties
  • Hospitality. While MMGY’s survey of travel safety perceptions was steadily increasing in advance of the holiday travel season, the second wave of COVID-19 may introduce new challenges to already-struggling global hospitality owners

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