How the Pandemic Changed Investor Buying Strategiesadmin
Prices Have Risen for Smaller Industrial, Office and Multifamily Properties, CoStar Data Shows
By Mark Heschmeyer
Real estate buyers rerouted their investments in the first quarter, focusing on smaller properties but sometimes paying more per square foot than they did before the pandemic hit, according to industry experts and CoStar data.
For industrial, office and multifamily properties, investors are paying 7% to 9% more on average than they were in the same quarter last year, CoStar data shows. Pricing in two of the harder-hit sectors is still cheaper — more so for hospitality, where distressed sales have dominated, than for retail, which has benefited from investment activity in net-lease real estate.
“Demand for properties for sale is still very high,” Derik Benson, senior vice president at real estate firm Kidder Mathews in San Jose, California, told CoStar News in an email. “Prices have increased since one year ago as interest rates are still very attractive with additional incentives” provided by the federal government.
Benson has seen industrial properties driving most of the demand but with office sales doing well in his markets too.
Just about every type of industrial building is trading across every risk profile, according to Abby Corbett, managing director and senior economist for CoStar Group. On average, the industrial properties acquired in the first quarter versus a year ago were about 11% smaller but averaged a 9.3% higher cost.
“We’re seeing everything from the cream of the crop Amazon-occupied properties trading for significant premiums to flex properties with value-add profiles being traded with plans to be reconfigured into last-mile distribution options in urban infill areas,” Corbett said.
Sale-leasebacks of industrial properties have provided retail tenants with a quick influx of much-needed liquidity as well as offering investors an attractive acquisition prospect with long-term lease structures in place, she noted.
In the office market, the average first-quarter deal size was 30% smaller in dollar value and 35% smaller in average building size, according to CoStar data. But the per-square-foot cost was 8.4% higher than a year ago.
Office “investors have generally been gravitating toward safety,” according to Michael Roessle, director of U.S. office analytics for CoStar. “Particularly among larger trades, buyers have been focused on top-quality assets that are fully leased with lengthy terms left on the lease or leases. This has contributed to the strength in pricing.”
Also keeping prices on the rise is the fact that most owners, and their lenders, have remained financially stable through the pandemic and haven’t had a need to dispose of assets at distressed prices, Roessle added.
Medical office properties have also gained a relative share of transaction activity, according to Corbett. Investors continue to recognize such properties’ resilience and the growing need for satellite medical space to cater to growing populations in various markets throughout the country.
In the multifamily sector, the average, first-quarter deal size was nearly 6% higher in dollar value driven by a 7.6% higher per-unit price than a year ago, according to CoStar data. However, the average property sold had about 28% fewer units.
“There is a disconnect between prices of prime=located multifamily properties and their income,” Hamid Soroudi, senior director at KW Commercial, the commercial real estate arm of Keller Williams Realty in Beverly Hills, California, told CoStar in an email. “While post-pandemic rents are lower and vacancies are high, the prices have not softened for prime multifamily properties.”
Investment in multifamily so far in 2021 is down marginally from the past few years, largely because the blockbuster California and New York deals that drove record volume in 2019 have been absent, according to John Affleck, vice president of market analytics for CoStar.
Instead, investors have been following renters to such Sun Belt markets as Dallas, Atlanta, Phoenix and Houston, replacing New York, Los Angeles, Washington and the San Francisco Bay Area for the top spots on the leader board.
In the retail market, the average building size sold in the first quarter was 9,616 square feet — 7.4% smaller than a year ago but only 1.1% cheaper, according to CoStar data. However, the average property sold had about 28% fewer units.
“Retail transaction activity is trending just shy of pre-pandemic levels as a result of the strong single-tenant, triple-net-lease deal flow,” CoStar’s Corbett said. “Investors have been targeting credit-quality occupancy with long-term leases in place for properties such as Home Depot, Walgreens, auto dealerships, fast-food restaurants and banks.”
In the hospitality sector, investors are buying properties with fewer rooms and paying a lot less, according to CoStar data. The average price per room sold was nearly 30% than what was paid in the first quarter of last year.
“Early on in COVID, call it March, April of 2020, we had a lot of people that were calling looking for some sort of deep discounts on hotel pricing. That really didn’t materialize right away,” Brian Resendez, senior vice president of hotels for SVN Bluestone & Hockley in Beaverton, Oregon, said in an interview.
What did occur though was growing pressure on federal, state and local governments to address housing for homeless people, he said. Hotels closed because of extended pandemic disruption have become acquisition targets for government and housing agencies or investors working with them.
SVN Bluestone & Hockley sold 12 hotels in 2021 that will be converted to shelters or affordable housing, all in Oregon or Washington state, according to Resendez. However, government funding to make such purchases has limits on what can be spent per room. That has kept pricing weak, he said.