The arrival of the COVID-19 pandemic required many state and local government agencies to issue forced business closures and stay-at-home orders. While necessary to control virus transmission and to ensure public health, the orders created significant and unexpected changes. Those businesses which could stay open had to investigate alternative service arrangements while others implemented a remote workforce format. To save costs many decided to furlough or terminate employees and delay investments in office or industrial real estate. Now that the pandemic has passed, there is renewed interest in commercial real estate. This is evidenced by the fact that over the last three months there has been a net positive absorption rate of 1.8M sq ft in commercial real estate. According to the National Association of Realtors (NAR) Commercial Market Insights – October 2021, Houston has a 12-month positive net absorption rate of 1.3M square feet with Austin closely following. The change reflects the increasing popularity of secondary markets. To help clients, prospects, and others, Calvetti Ferguson has provided a summary of the key report findings below.
Improving Economic Conditions
Improvement in commercial real estate occupancy rates is directly related to improving economic conditions. This reality is reflected in the finding that 20% of metro areas surveyed had more jobs available in August 2021 compared to February 2020. The positive job gains have occurred primarily in secondary markets, while major metropolitan areas (New York, Los Angeles) have experienced significant declines. Not surprisingly, the demand for office space has improved in the secondary markets and declined elsewhere.
There is also the declining number of remote workers which is driving demand. The study found that 13.2% of employees working remotely declined by 35.4% since May 2020. The same decline was found amongst IT and mathematical workers with only 43.5% currently working remotely down from 75.9% in May 2020. The emergence of new COVID variants, including the new Omicron, combined with vaccination requirements have slowed the return to work timetable. Despite this, the return of workers will continue to have a positive impact on demand.
Finally, the boost in retail sales up 16% year over year and a 15% year over a year in August 2021, reflects the reality that consumers are once again visiting brick and mortar retail locations. The strongest growth markets were in clothing stores, motor vehicles, furniture, and other miscellaneous retail. Concurrently, sales at online retails rose 18%, a rate higher than department stores, accounting for 17% of total retail sales up from 15% in January 2020.
The confluence of these economic factors has created favorable conditions for the increased consumption of commercial real estate.
Office Real Estate
The continued net positive absorption of office space is an encouraging sign for real estate companies and investors. Concerns about non-renewals and empty office space are giving way to more favorable numbers. It was reported that 1.8M square feet of office space had been absorbed in the last three months building upon the 7.95 million square feet absorbed in Q2. One inhibiting factor is the delayed return to work schedule of many large companies. Despite this, both Austin and Houston lead the nation with the top net positive absorption rate over the last 12 months.
There is currently over 139M square feet of office space under construction. When combined with space that is currently available it is expected the national vacancy average will increase by 12.5%. Many of the largest projects are in major metropolitan areas still struggling with high vacancy rates. Given this reality, it is likely that office rents overall will not increase substantially in the next 12 months.
Industrial Real Estate
The industrial sector continues to deal with unprecedented demand as net absorption of space reached the highest level in the last ten years (positive net absorption of 476M square feet). This stands in stark contrast to pre-pandemic numbers when the 12-month net absorption was 180 million square feet. It is not a surprise that many metro areas reported an increase of at least 7% in rent growth. The rising competition for limited space will continue to force rents higher in the foreseeable future.
There is currently over 455M square feet of industrial space under construction which towers over pre-pandemic levels of 344M square feet. A significant amount of new industrial construction is occurring in Texas with Dallas Fort Worth reporting 50M square feet, Houston 16M square feet, Austin 11M square feet, and San Antonio 10M square feet. In addition, the top markets by absorption feature both Dallas and Houston amongst the top 5.
The changing demand for office and industrial space can mean opportunity for Texas real estate developers, investors, and companies. The demand for office space will only continue to grow as companies develop and implement return to work timetables. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Calvetti Ferguson can help.