DST’s and the New Commercial Real Estate Order

2021 set a record for U.S. Commercial property sales.  Overall, commercial property sales totaled $809 billion in 2021, according to the data firm Real Capital Analytics.

One of the primary catalysts of this frenzied activity level is the pandemic and how it is reordering the way people live, work and play.  This has a direct impact on the desirability or lack thereof different commercial real estate types.

First and foremost, investors loaded up on self-storage, betting that the continuing reordering of work and family life will keep demand strong.  As previously mentioned, it is the pandemic’s “hot property.”

Occupancy nationwide currently averages 97%.  This should tell investors there isn’t enough of it and we aren’t charging enough for what there is.

Industrial warehousing, serving as next day delivery fulfillment centers for the e-commerce boom also proved very popular.

Finally, investors bought apartment buildings at an unprecedented clip.  In doing so, they capitalized on strong post-lock down demand for housing and corresponding rent increases.

As discussed in earlier pieces, some of these trends were already in place, the pandemic simply accelerated them.  We believe storage is such a standout because naturally peripatetic Americans will move about even more pursuing greater economic opportunity now that remote work is the new norm.  More change usually results in greater demand for storage.

What you see here is institutional investors wagering billions of dollars that the work and lifestyle changes brought about by Covid-19 aren’t transitory.  Supply chain shortages are continuing this by limiting potential development of competing properties.

Despite the Biden administrations claims to the contrary, port congestion is getting worse not better.  It is now spreading across the country, threatening to extend shipping delays and further drive up costs.

Container ships are now backing up off both coastlines from Oakland, CA to Charleston, SC.  This is hugely extending wait times which exacerbates supply chain shortages.

Correspondingly, investors snubbed properties that had been favorites for years but in the pandemics wake appear less reliable.  Office buildings, particularly in the largest urban markets went begging.  Single tenant net lease retail properties also became more problematic.

Further, there is a pronounced geography to these trends.  Hit hardest were bicoastal office and retail properties in such heretofore stalwart markets as New York and San Francisco.  Investors continue to show strong preference for sunbelt states where the weather is warmer, taxes are lower and the business climate more friendly.

Depending on interest rates, we believe this trend may continue into 2022.  However, due to the high priced nature of the aforementioned assets, it could spread out more as institutional money looks for better value.

In light of this, we would urge investors to give serious consideration to more property types such as student housing, medical office buildings and data centers which have not yet seen the same sharp price increases.

With a changing of the political guard in November of 2022, we believe things have the potential to become less chaotic, the rhetoric more muted and fear will begin to subside. The aforementioned property types may benefit.


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