Commercial real estate transactions surged in 2021. Here are 6 reasons why.
The residential real estate market has received a lot of attention over the past couple of years, and for good reason. The housing market has become so tight that inventory is extremely hard to come by in almost every market, and prices are now higher than ever for houses. Properties offered for sale are usually seized in record time – and often sell for more than the asking price – which has made it difficult for most buyers to compete.
Case in point: A moderately priced home recently came up for sale in Raleigh, North Carolina, and it was absolutely inundated with potential buyers looking for affordable properties. This mad dash of buyers was enough to grab national headlines, but any buyer who’s been looking for a property in the last couple of years certainly wasn’t surprised by the overwhelming interest. That’s just part of what buyers face when looking for a property in a booming real estate market.
But the real estate buying frenzy that has been happening recently has not been limited to the residential housing market. Commercial real estate transactions have also exploded, with a surprising increase in transactions over the past year. Throughout 2021, investors big and small have snapped up everything from apartment buildings, warehouses and distribution centers to other types of commercial properties, like hotels. From the second quarter of 2021, multi-family ownership sales increased 26% year over year and non-residential properties were up 16% year over year. There were also increases in sales rates across all types of commercial properties. The rampant demand for commercial properties has also generated $193 billion in commercial real estate transactions that occurred in the third quarter of 2021 – and a record $809 billion in commercial property sales for the full year of 2021.
So what exactly has led to the surge in commercial real estate transactions throughout 2021 – and why? EquityMultiple has compiled a list of six important trends in commercial real estate markets in 2021, covering topics ranging from the rise of retail investors to the impact of the Federal Reserve’s pandemic policies. Here’s what you need to know.
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Weakness in bond markets has prompted investors to look for alternatives
When returns on traditional investments, such as stocks or bonds, are falling, investors tend to look for opportunities to achieve target returns on their investments. At the end of 2021, the American stock market posted the best returns over three years seen in 24 years, but the same was not true for bonds. In December 2021, the inflation rate in the United States jumped a whopping 7%– which, in turn, quickly drove down bond prices and reduced the potential for high returns for investors.
Falling bond prices pushed key bond market indices up their first losses since 2013, and has led investors to look for other ways to grow their money, including commercial real estate securities, real estate investment trusts, and other commercial real estate investments. Although potentially risky, commercial real estate transactions can be lucrative for investors, with average annual returns between 6% and 12%, with significant upside potential depending on market conditions and other factors. This means that investing in commercial real estate has the potential for a significantly higher return on investment compared to average bond yield.
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The Federal Reserve prevented a troubled real estate sale, making easy debt available for transactions
When the COVID-19 pandemic hit, investors expected the commercial real estate market to take a hit, allowing them to snap up distressed properties at bargain prices. This did not happen, however, as the Federal Reserve made borrowing much easier and cheaper by dramatically lowering interest rates at the start of the pandemic. Lower cost of borrowing generated $102 billion in loans extended to landlords in the first nine months of 2021, preventing the commercial property market from collapsing.
These loans were then converted into commercial mortgage-backed securities, which are offered to individual investors, investment firms and other money management companies in the form of shares. In doing so, entire swathes of investors have been able to participate in commercial real estate transactions without having to finance the full purchase of physical properties or land. Apartment buildings, life science labs, and industrial properties—which were expected to generate higher returns than other commercial properties, such as shopping malls or malls—were particularly sought after. These types of commercial properties have given over $193 billion revenue in the third quarter of 2021.
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Demand for fulfillment centers has surged
Online shopping has become even more popular than before during the pandemic as in-person shopping has become a dangerous and in some cases nearly impossible task. This increase in online orders for everything from groceries to toilet paper meant online and online retailers had to rent more space in fulfillment centers to have a base to store their inventory and ship shipments. .
In turn, demand for distribution centers has surged and vacancy rates for these properties reached historic lows. This led to investors capitalizing on the trend by buying distribution centers and then reaping the benefits of high rental prices. Creeping supply chain shortages have also made it difficult to develop more of these types of properties, which has only added fuel to the fire. Distribution centers and warehouses were suddenly selling at a premium, and investors were willing to pay the price for these properties, which kept transaction rates high.
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Soaring house prices have increased demand for apartment rentals
Between the shortage of inventory in the housing market and rapidly rising home prices, buyers have been shut out or driven out of home purchases across the country. In turn, demand for rental properties has exploded, leading investors to turn to apartment buildings. In 2021, sales of multi-family properties – which include apartments, duplexes, quadruplexes and other multi-family units –totaled $335.3 billionup 128% over the previous year.
By buying apartment buildings, commercial real estate investors are able to capitalize on the opportunity to take advantage of the increase in rental prices that has occurred. In 2021, the rent increased by one 11% average– three times the normal rate – and it only went up from there. Since February 2022, the national average rent price for one-bedroom units increased by 22.6% year over year, and the rent for two-bedroom units increased by an average of 20.4%.
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Small investors flocked to commercial real estate with non-traded real estate investment trusts
Real estate investment trusts are attractive to investors because they allow investors to buy shares of a trust that invests in commercial real estate projects rather than buying and managing their own properties. This can make commercial real estate less risky and more affordable for investors, but you need to be an accredited investor to invest in most traditional, publicly traded REITs, which come with many financial requirementssuch as high net worth and high income.
As such, it can be difficult for smaller investors to qualify, which has led them to look to other options such as real estate crowdfunding, which opens up access to commercial real estate transitions and other opportunities. other private fund structures. Another option includes open-end funds, known as non-traded real estate investment trusts. Unlisted REITs accounted for about 42% of the alternative investment market in 2021, with approximately $36.5 billion in total fundraising this year alone. Part of the appeal is that, unlike most traditional REITs, investors can buy non-traded REITs for as little as $2,500 – and there’s an opportunity for big returns in exchange. Most unlisted REITs pay dividends above 5%which is competitive with — and often outperforms — other types of fixed income investments.
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Investors were looking for an inflation hedge
Rising inflation has become a growing problem as the rate of inflation increased by 7% in 2021. Periods of runaway inflation are hard on the economy because they drive up the price of everything from rent to groceries, making the dollar less valuable. Inflation can also seriously affect the potential returns of investments, and this is especially true for investments with fixed rates, such as money market accounts, as these rates are generally lower than the rate of inflation, which means that the money earned on these accounts won’t cover the loss from inflation.
The only type of investment that tends to resist bouts of inflation, however, is commercial real estate. This is because investors may increase the rental or lease rates of their properties to combat potential losses due to inflation. However, investors bought a record number of commercial properties in 2021 to hedge against inflation and mitigate potential losses. This, in turn, has contributed to the boom in real estate transactions.
This story originally appeared on EquityMultiple and was produced and distributed in partnership with Stacker Studio.