While much of the United States is beginning to open back up with the recent rollout of vaccines nationwide, there is still considerable uncertainty about the lasting effects on the commercial real estate market because of the COVID-19 pandemic. Real Capital Analytics (“RCA”) reports that commercial property sales were up 66% from a year earlier in April, which shows positive signs of a commercial real estate recovery, albeit the large increase is partially due to a slow 2020. While this is a positive sign for 2021 and beyond, total commercial real estate investment averaged $34.4 billion for every year from 2015 through 2019 and April 2021’s deal volume was 18% below that level (per RCA).
Investors in commercial properties are likely still cautious about the overall market, as employers continue to weigh the benefits of continuing to work from home or returning to the office. There are, however, sectors that have outperformed the overall market, mainly industrial and apartments have returned to their pre-pandemic levels.
Within the Federal Government sector, the Biden administration has requested that agencies submit their finalized plans for returning federal workers to the office. Furthermore, the Washington Post reported that in June, the current administration is set to announce guidance as to when and how many employees may return to the office. This appears to largely leave it in the hands of the federal agencies on whether they will return to the office full time, continue largely working from home, or employ a hybrid policy of both working from home and from the office. As the guidance is released and agencies submit their plans for return, this should likely help stabilize how investors in federally leased space will view investments in this area. Agencies that elect to continue working from home in the long run may avert investors from purchasing assets with leases with these agencies. Although backed by the federal government, investors may be wary of renewal risks associated with potential vacates or reductions in leased square footage. Alternatively, leased properties to agencies that elect to fully return to the office may command a pricing premium due to the potential reduction in the risks mentioned above relating to renewals and square footage needs.
The lease and credit quality of federal government tenancies has commanded a premium in the market in recent months, mainly as investors have searched for stable, long-term investments with limited risks (as compared to traditional commercial real estate investments). As the Biden administration and the federal agencies make their plans for return to work, the coming months should be very interesting to see how pricing will vary from agency to agency based on how and if they plan on returning to the office.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Assistant Vice President, Acquisitions
Boyd Watterson Asset Management, LLC