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CRE and The Next Normal

August 31, 2021

Impact of COVID-19 on Commercial Real Estate

So we are still in the grasp of Covid-19, and in San Antonio it seems we have all come to grips with this Next Normal. Many vaccinated, many not, many new infections, and thankfully, fewer deaths. What impact is this having on Commercial Real Estate?

The big lockdown last year is now in the past, and we have all adapted and learned to cope. The unemployment rate is down to 5.5%, compared to the historic lows under 3% pre-Covid. In March and April last year, as the virus hit and we faced lockdowns, San Antonio lost 130,511 jobs, according the Dallas Federal Reserve; yet as of June this year more than 83% of those lost were regained.

While some businesses went under, we also have seen an amazing number of new start-ups. These folks want the freedom of controlling their own fate and their response to this big shock is “I am going out on my own. Always wanted to and now I just got to do it!” God bless’em! That’s the American spirit!

Retail and Office

To review the sectors, retail has stabilized with occupancies and rents about even with the levels before Covid hit last year. According to Foresite CRE’s retail report, occupancies stand at 94.2%, compared to 94.3% last year, in the grips of Covid and 95% two years ago in 2019; all in all that is remarkably stable performance for retailers who have had the biggest struggle through the pandemic.

However, asking rents have dropped a full $2 bucks a square foot from 2019; it is now at $15.96 versus $17.94 before Covid. This shows that Landlords have had to give up ground on rents and shorten the length of leases to keep tenants in place.

Construction, Cap Rates & Investor Interest

We have just over 900,000 square feet under construction. On retail center sales, 35 centers are currently on the market at cap rates around 6.8% for Class A centers and 7.4% for Class B, with asking prices just a bit lower than before Covid. This reflects the enormous amount of investor capital seeking deals not just in San Antonio but nationwide. In fact, Austin actually placed #1 in attracting international capital for investments, tying with Boston for the top spot.

Apartments and Land

Apartments are doing well, though small property owners are being hurt badly by the eviction moratorium. Land for new residential construction, both single family and multifamily, is in high demand. Zoning, sewer and water availability are the keys, and make readily developable sites scarce and expensive. Industrial is booming with 1.8-million square feet under construction, according to Kim Gatley’s SACREDA report, and demand continuing to outpace supply.

Office Occupancy

Office space occupancy moved down a bit in the past year, from 89.5% to 88.9%, according to NAI Partners, who tracks 63.8-million square feet, with over 1.2-million square feet under construction. Downtown, however, has just under 83% leased, as a substantial amount of the new construction is located there. Since it takes about 2 years to build a multi-story Class A building, most of the construction started before the pandemic. We can expect office construction to drop dramatically I think, as this is the sector with the most uncertainty over future utilization.

Future of Office with WFH as the Next Normal

What will the impact of Work From Home (WFH) and hybrid work weeks mean for the future of office space? I plan on trying to tackle this difficult subject in detail next month since it is a hotly debated and complicated topic.