See below for Andy Little's recent commentary in the Richmond Times-Dispatch.
When John Fogerty sang “Bother me tomorrow, today I’ll buy no sorrows” in Creedence Clearwater Revival’s hit song “Lookin’ Out My Back Door,” he probably wasn’t singing about an economic boom following an unprecedented pandemic-induced depression.
The tone of the song is positive and that is the mood in today’s market.
And why shouldn’t the mood be positive?
Money is cheap and plentiful and that is what commercial and multifamily real estate investors thrive on.
Rates are hovering in the high 2% and low 3% range for 10-year loans backed by multifamily and lower leverage commercial properties and below 4% for most loans, according to the most recent John B. Levy & Co. Inc.’s commercial mortgage survey.
While not all property types have rebounded the same, money is now available for hotels and retail properties, which wasn’t true a few months ago.
Fear of the pandemic’s aftereffects is lingering for some properties and in some locations more than others, but mostly, those fears are in the rear-view mirror.
One side effect related to the pandemic is that a large percentage of institutional capital comes out of New York, Chicago, Boston, and San Francisco, and those markets are behind others in the healing process.
That means many lenders are still viewing the market through the lens of what they are experiencing. But what is true in New York isn’t necessarily true in Richmond.
To that point, a recent report from Apartment List showed that rental rates increased 8.4% between May 2020 and last month in the Richmond area. That compares to a year-over-year increase of 5.3% across all markets nationally and 2.3% in Virginia.
To punctuate that growth, it appears that Richmond’s 8.4% year-over-year growth is accelerating. In May, rents were up 2% from the previous month.
While apartment rents are rebounding in New York and San Francisco, rental growth is negative in both markets from the pre-pandemic compared to post-pandemic. When comparing March 2020 to last month, New York rents are down 12% and San Francisco rents are down 17%, according to research from Apartment List.
In the office sector, things are a bit murkier, but like the apartment sector, larger markets are still feeling pandemic uncertainty.
A first-quarter 2021 report from commercial real estate brokerage JLL related to office leasing in New York indicated quarterly leasing volume hit 25-year lows. Adding insult to injury, the space availability rate reached nearly 20%, including sublease space, which is a 25-year high.
The JLL report for San Francisco was a little more optimistic for the first quarter, but vacancy, including sublease availability, is pushing 17% and net absorption in the first quarter showed over 2.2 million square feet going back on the market.
In Richmond, the news is much better for office. Year-to-date absorption is positive and total vacancy is around 12%, according to JLL.
The report indicated more sublease space is expected to become available, but there was still optimism in the market. The report also indicated a continuing migration of tenants to downtown with an increase in investor appetite for buildings there.
While there are other issues looming in the commercial real estate market, like the rising cost of raw materials and changes in the capital gains tax rate, those are concerns for tomorrow. Today, things are looking pretty good.
John B. Levy & Co. partner and investment banker Andrew Little can be reached at email@example.com.