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Economic and Market Commentary

Commercial Real Estate Fundamentals After the COVID-19 Outbreak: Surprisingly Attractive

Executive Summary

  • Unlike the aftermath of the global financial crisis, when U.S. real estate values plummeted across the board, the pandemic has had disparate effects: It dealt a blow to retail, office and hospitality sectors while industrial and multi-family sectors have remained relatively unscathed.
  • Even within the commercial real estate category, there has been dispersion among subsectors: Industrial has outperformed while office, hospitality and retail have yet to bounce back. This has created unique and potentially fruitful investment opportunities.
  • Our research seeks to assess valuations for a range of commercial property types. To do so, we devised a cyclically adjusted capitalization rate that serves as a real measure of relative value across asset classes and property types. According to this metric, commercial real estate appears to have a significantly higher risk premium than other, traditional asset classes.
  • Based on historical data, secular trends and technical and fundamental factors, we believe commercial real estate is an attractive asset class. We favor industrial, multi-family and hospitality sectors, yet remain cautious on retail. We have a mixed outlook for office properties.

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