Introduction to Commercial Real Estate Market Trends

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The landscape of commercial real estate (CRE) has experienced significant shifts since the onset of the COVID-19 pandemic. These changes have been driven by alterations in work patterns, consumer behaviour, and economic dynamics. Here's an overview of the key market trends since the COVID-19 lockdowns:

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1. Impact of Remote and Hybrid Work: With many companies adopting remote or hybrid work models, there has been a notable impact on office spaces. Traditional office buildings, once the epicentre of white-collar jobs, have seen reduced centrality in the post-pandemic world. This shift has affected not just office spaces but also businesses in downtown areas, such as eateries and service shops, which previously relied on the influx of office workers.

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2. Rental Rate Growth: Despite the challenges posed by the pandemic, the CRE market has shown resilience, particularly in rental rate growth. This growth has been evident across various sectors, with some, like the apartment and industrial sectors, experiencing significant growth. For instance, these sectors have seen near or above double-digit four-quarter growth. This robust growth is a testament to the underlying strength of the market and suggests a recovery trajectory in many segments.

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3. Funds From Operations (FFO) Growth: Another critical indicator of the health of the CRE market is the Funds From Operations per share growth. As of the last available data, this metric remains close to the five-year average, standing at 5.8%. This stability in FFO per share growth indicates a fundamental soundness in the commercial real estate space, despite the turbulent economic backdrop.

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4. Supply and Demand Equilibrium: The balance between supply and demand in the CRE market has also undergone changes. There's been a decline in new CRE supply in major U.S. metropolitan areas, attributed to higher capital costs and tighter credit conditions. This decline in supply, coupled with steady demand, has led to a reasonably balanced market landscape, providing a sound fundamental backdrop for the sectors.

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5. Long-term Growth in Industrial Real Estate: Industrial real estate properties, in particular, have been on a 12-year run of value growth. Almost every quarter since 2010 has seen improving fundamentals in the U.S. market, characterised by declining vacancy rates, increasing rental rates, and new development. This sustained growth highlights the sector's resilience and potential for continued expansion.

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In conclusion, while the pandemic has brought about significant changes and challenges in the commercial real estate market, the fundamentals, as indicated by rental rate growth and FFO per share growth, remain robust. These trends point towards a market that is adjusting and potentially thriving in the new normal.

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