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“Bulle watch”Explores trends that may indicate future economic and / or housing market problems.
Buzz: Two of the hottest niches in commercial real estate in August are competitors looking to profit from growth in consumer spending – warehouses, which fuel online shopping; and malls, where people go looking for things they can’t get online.
Source: Monthly report from the Green Street real estate tracker on commercial property values for the month of August.
The trend
Warehouses and malls helped push the Green Street All Property Index 6% in August to a record high.
This benchmark is up 20% in the past 12 months, but only 8% from pre-pandemic levels. This gap is reminiscent of the sharp fall in prices in spring 2020 amid the uncertainty of the first days of the economic cooling of the coronavirus.
Dissection
In the eyes of investors, more buying is good for anyone tied to ringing cash registers, even for entities that appear to be competitors. Here is how the 11 niches followed by the index behaved, in order of performance for the month of August …
1. Industrial space: Warehouse and factory space values jumped 17% in the month and 39% in 12 months. It ranks second in the top 11 for the year and sits 41% above pre-pandemic levels – the best performance of those niches. The nation doesn’t seem to have enough warehouse space to store everything we buy. Plus, with global supply chains always broken, large inventories have become a trader’s lifeline.
2 (tie). Linear shopping centers: Community shopping centers grew 14% on the month and 25% in 12 months. The segment ranks # 5 and is 6% above the pre-pandemic level – the seventh best. Neighborhood malls today don’t really sell a lot of merchandise that goes through all of the new warehouse space. This jump in values is much more about consumers who are finally returning to stores for meals, beauty products, financial services, workouts and medical services.
2 (tie). Self-service storage: Increased 14% on the month and 47% in 12 months. It ranks best of 11 and is 40% above pre-pandemic level – second best. These home mini-warehouses were driven, in part, by a need to tidy up their belongings, as changes in working from home demanded more living space.
4 (tie). Apartments: Increased 5% on the month and 23% in 12 months. That’s No. 7 and up 13% during the pandemic – fifth best. Rising rents have helped here.
4 (tie). Shopping centers: Increased 5% on the month and 9% in 12 months. The segment is the second worst and is still down 13% in the era of the pandemic – the worst of the niches. Top quality malls have a pulse. The rest? Not so sure.
4 (tie). Mobile home parks: Increased 5% on the month and 28% in 12 months. These communities rank third and are 31% above the pre-pandemic level, at number three. Places to live are sought after.
7 (tie). Desks: Increased 3% on the month and 4% in 12 months. Worst of 11 niches and still down 1% from pre-pandemic level, third worst. Is a delayed trend of returning to the office hurts even more?
7 (tie). Health care: Increased 3% on the month and 10% in 12 months. This is # 9 and 2% above the pre-pandemic level – # 8 of 11. This is a slow return to normal for these facilities.
7 (tie). Accommodation: Increased 3% on the month and 28% in 12 months. That’s enough for third place, but the sector is still down 1% from pre-pandemic levels, making it No. 9 out of 11. The powerful delta variant of the coronavirus has dashed all hopes rebound.
10 (tie). Net lease: Flat within the month but up 25% in 12 months. At No. 5 and 16% above pre-pandemic level – fourth best. These properties – typically stand-alone single-tenant sites – have been in high demand.
10 (tie). Student dormitories: Flat over the month but up 22% in 12 months. This ranks # 8 and 9% above the pre-pandemic level – # 6. Questions swirl about the strength of a move back to campus.
Other views
A little hindsight:
Actions? Total market return over the same time period, as measured by the S&P 500 Index, increased 3% in the month, 30% in the past 12 months – and 63% from levels before the pandemic.
Houses? The median sale price of an existing California single-family home increased 40% from February 2020 to July 2021, according to the California Association of Realtors.
How sparkling?
On a scale of zero bubble (no bubble here) to five bubbles (five alarm alert) … THREE BUBBLES!
Part of this real estate valuation just doesn’t make sense. It’s more like the fallout from investors’ risk appetite when the bank pays 0%. Other recent gains have largely been rebounds from virus-cooled 2020 lows. Overvaluation is therefore a niche by niche problem.
Still, the gain in commercial real estate is about one-eighth the size of stocks and one-fifth of homes.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be contacted at [email protected]
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