The commercial real estate market has showed surprising resiliency over the last year since COVID hit the scene, particular in Central Texas. Predictions of a major crash in property valuations, “fire sales”, and mass foreclosures never happened. Projections of an anemic GDP of under 3% well into 2021 has not happened. As of today, the GDP is a 6.5% growth which is a healthy number considering. This is due to, in large part, the mainstream acceptance of the COVID vaccine, continued low interest rates, and strong underlying economics that were in place pre-COVID.
When it comes to acquisition activity for properties valued over $2.5M, overall activity in Q1 2021 nationwide has been down 36% for office, 43% for Retail, 41% or Industrial, but surprisingly up 13% for Hotel (Reference – National Association of Realtors – Lawrence Yun). This doesn’t mean valuations are down, just volume of transactions. Overall, valuations are only down about 6%, up from being 10% down in the 2nd quarter of 2020.
On the leasing activity front, overall lease rates for the industrial market held steady through the pandemic due to the continued demand for storage, distribution and manufacturing space for all types of products. Interestingly, Austin has an overall industrial space inventory of 53M sq.ft. That is relatively small compared to other cities like Atlanta at 773M sq.ft., Houston at 640 M sq.ft., Dallas at 921 M sq.ft., Orlando at 158M sq.ft. and Memphis at 268 M sq.ft.
Lease rates for the office market has also held fairly steady and will start to climb as companies bring employees back to work increasing the demand for space. Where does Austin compare to other cities regarding Class A office rental rates? Austin is at $53/ft/yr, Seattle is at $55/ft/yr, LA is at $43/ft/yr, Boston is at $69/ft/yr, San Fransisco is at $79/ft/yr and Manhattan is at $83/ft/yr.
Most experts in, and around, the commercial real estate industry agree that commercial real estate is heading upwards in valuation and rental rates with the way the economy is trending. One thing that could derail this positive trend is inflation which is showing itself in some nasty ways with the increase in lumber, steel, fuel and many other commodities.