Profimex Market Review Update – May 6, 2021
Distress One the Horizon for Troubled Office Sector
According to analysis of first-quarter data by Moody’s Analytics REIS, distress is now hitting this office sector. Vacancies soared in the first quarter rising by 40 basis points nationally to 18.2%, while effective rents have fallen by 0.8%. As was the case with some of the other real estate sectors during the Pandemic, including hospitality and urban-core multifamily, the distress has primarily been on the cash flow side and few owners are selling at a significant discount at this point. Victor Canalog, head of CRE Economics at Moody’s Analytics, is not ruling out distressed sale pricing in the future; however, he notes that there is a differentiation between a fire-sale and a discount due to the intermediate to long-term uncertainty resulting from work-from-home trends. REIS predicts that this year will continue to be rough for the office sector; however, projected GDP growth of 5% in the net two years will mitigate the worst for the asset class. In the end, a lag in CRE market stress will be followed by a slow and steady recovery, which is expected to begin in the latter half of 2022.
Why Investors Flocked to Class A Student Housing
Pricing for class-A student housing properties eclipsed pre-pandemic levels in 2020 according to analysis by Walker & Dunlop. The average price per-unit was $251,000 representing 18% growth year-over-year. Buyers were primarily drawn to stabilized, high-end, often high-rise properties near the heart of the campus. Additionally, Class-A properties in primary markets, including the hard-hit urban-core, were able to maintain pre-pandemic pricing levels. According to Walker & Dunlop, this is reflective of the high level of interest from institutional, foreign, and sovereign capital. It should be noted that Class-B and C student housing did not fair as well, with the price per-bed dropping 11% since 2019. While this could reflect changes in enrollment trends, living habits, or less institutional capital; it most likely reflects the fact that students living in class-A student housing come from families that were least affected by the economic impacts of the pandemic. Once enrollment and financing for class-B and C student housing returns, expect to see an influx of opportunity.