By: Ken Reinschmidt, Broker
At Saratoga, we continually work to stay on top of the Commercial Real Estate markets and develop a vision for their future here in Whatcom County. One tool for keeping up on the national CRE trends is to attend presentations by nationally recognized economists and apply our local knowledge to try and peak down the road to see where we are going with commercial real estate in Whatcom County. I recently attended an on-line presentation by CCIM’s Chief Economist, KC Conway. I attempt a brief summary with the following Saratoga insights article
COVID-19 has caused significant disruption in almost all classes of commercial real estate. The expectation of high interest rates is now adding to the disruption to CRE markets. It is a time of high uncertainty. CAP rates have historically followed increases in interest rates. We expect this to happen in certain regional markets and certain CRE classes, but we expect that not all regions and CRE classes will follow. We will discuss what the future may hold for CRE on a national level and how things may filter down to Whatcom County.
Office properties have been most affected. Historical indicators to predict supply and demand for office space has been upended and it will take several years to understand the complete impact on Office. We will discuss the office sector later in this insights article.
Industrial properties have seen the least impact from COVID-19. Previous to COVID-19, demand for industrial space was high and supply was tight. Demand for industrial space has continued to increase as business s look for more warehouse space to deal with increased shipping demands as consumers are purchasing record amounts of goods on-line and business scrambles to manage inventories through the supply chain disruptions caused by challenges brought on by the Pandemic. Rents will remain strong and vacancies will remain low for several years as the market remains strong. Investor demand will also most likely resist the affect of rising interest rates and keep CAP rates in the industrial sector low and pricing high. We observe that the industrial real estate market in Whatcom County is following this same trend and is in line with the national industrial CRE market.
Multi-Family has also seen minimal impact from COVID because vacancy has been extremely low and demand remains high in most regions. This market condition combined with the situation that so many people are staying home and working from home has counterbalanced the uncertainty of eviction moratoriums and the strong possibility of rising interest rates. That being said, there is growing uncertainty of the future of large, metropolitan, urban multifamily properties. COVID-19 has caused a growing trend for increased mobility in the workforce as significant numbers of people work remotely. The pandemic has caused people to seek more suburban and less dense places to live. This may change the pre-pandemic trend for migration of the workforce to urban centers. This has resulted in great uncertainty in what the future holds for multi-family investments. Vacancy rates remain low in Whatcom County and we may benefit from mobility in the workforce as we see people continue to locate here. We expect the multi-family market in Whatcom County to resist these trends and remain strong and CAP rates to remain stable and low.
Office space is a big unknown, as mentioned above. Traditionally demand for office space follows jobs. That is not necessarily the case going forward due to job mobility and the current trend for people looking to locate in a more suburban and/or less populated region. Also, analysts expect employers to continue providing workers with flexibility to work from home either full time and more commonly part time. Demand for office space will most likely drop, mostly in urban metro areas. Currently sub-lease listings are at the highest levels ever recorded as companies are downsizing their office space. Office space absorption is negative in many markets across the country. Rents in Urban markets are becoming soft. Current trends also show companies are working to re-locate part, or all of their operations to suburban and less densely populated areas. All of these factors contribute to a highly uncertain market for the office sector that will most likely take several years to adjust. New metrics for estimating demand for office space will need to be developed. That being said, Whatcom County is a suburban type of market and we continue to work with office tenants looking for space. Supply of office space in Whatcom County is tight and we think that rent rates will remain stable and will not decline.
The retail real estate market has been experiencing dramatic changes over the past 5-10 years as on-line shopping gains more market share and retailers struggle to compete with the on-line market place. Shopping center vacancies have been steadily declining as well as rents. Of course, incredible locations have been somewhat insulated from these trends and retail locations have adjusted by working to find and secure service and experience related tenants. Online-shopping has exploded as a result of the pandemic and these trends have accelerated. The future of retail real estate is challenging. Shopping center vacancies are at all time highs and growth in big box store development has slowed. It is difficult to predict the future of retail. One bright spot is traditional strong grocery stores such as Kroger, Albertsons, and Whole Foods etc… They have not been replaced with on-line shopping. Retail strip centers near strong grocery anchors are bucking this trend, especially when combined with a strong mix of service-related tenants. Pet related tenants are one of the favorites here.
We hope you find these insights interesting and helpful. Please don’t hesitate to call our office if you wish to discuss our local CRE market further.