What the Pandemic Did

The pandemic was a once-in-a-generation event for all real estate, including commercial. September 2001 was a culture shock and a tragedy, but it did not cause malls to close. The credit crisis of 2008-2009 put a great deal of real estate activity on hold, but markets returned to normal once the government helped banks regain their footing. The pandemic has been different. It created changes in people’s behavior and has produced lasting effects for commercial real estate.

The largest positive effect has been on industrials. Those were already tracking upward and the pandemic hit the gas pedal for them. See the accompanying article in this online newsletter, “Industrials on Top.”

Costar reports an average price increase of 93% from Q1 2019 to Q1 2023 in the Greater Boston industrial sector.

Apartments have been riding a long-term upward trend since the 1970s. Back then, market rents were simply too low to make construction of new rental apartments feasible, and most new construction was for what was then a new thing, the condominium. Apartment rents began trending up. Today they are sky high, to the point where apartments have become unaffordable for many, with households spending an unhealthy proportion of their income on rent. Tenants’ loss has been investors’ gain. At today’s rents, Greater Boston can – and, in fact, must – build apartments at a rapid pace, to put some balance back into supply and demand.

Costar reports an average price increase of 41% from Q1 2019 to Q1 2023 in the Greater Boston multi-family sector.

Retail is the third of the four large commercial real estate sectors. Retail is the most volatile sector, experiencing sharp downturns in recessions and rising rents when the economy has been strong. We have not seen a significant recession in years, and yet the prospects for the retail sector are uncertain.

Ten years ago, an investor came into my office with a question about whether to invest in a retail condominium in the stretch of Mass. Ave. between Harvard and Central Squares in Cambridge. I was able to show him the state of the market with comparable sales and comparable rents. But he didn’t want to know the property’s market value. He wanted to know what was likely to happen to its market value over a period of years. This investor was sophisticated. His question was about tomorrow. Given the Internet, what would happen to shopping itself? I could point out that restaurant business was growing, with more and more people getting more and more of their meals away from home. And restaurants do fill up a high proportion of the retail space in a stretch like Mass. Ave. But what about all those other retailers? His hesitation proved valid. In fact, malls have not done well. Retail in general has not done well. The pandemic hammered down retail businesses, including restaurants, accelerating a trend that was already in the works.

Costar reports an average price increase of 20% from Q1 2019 to Q1 2023 in the Greater Boston retail sector. But construction starts are low. Malls close. Some locations appear healthy, but others sprout “for rent” signs. Retail seems weak in ways that average prices don’t reflect.

The fourth sector is offices. Here again, CoStar sees stability in rents and prices. Costar reports an average price increase of 25% from Q1 2019 to Q1 2023 in the Greater Boston office sector. In spite of the obvious hollowing out of offices because of the work-from-home trend that began during the pandemic, office prices were on the rise, not declining, in 2021. Possibly investors anticipated a return to normal office work practices once the pandemic abated. But work-from-home remains strong. The signs of decline are found not in rent and price averages but in sales and rental activity. Sales activity for offices in 2022-2023 has gone to near zero. In Greater Boston, the volume of office building sales in 2022-2023 is in sharp decline. The locations where new office buildings are feasible are few. Bioscience laboratories are counted as part of the office market. Strength in laboratories has propped up the office sector to a degree. But unless office workers return, the fate of the office sector may be bleak. Some office buildings may become biosciences laboratories. Others may simply empty out and stay that way.

The four-year trend in Greater Boston for the four commercial sectors, spanning the pandemic years to date, is as follows:

• Industrials up 93%

• Multi-families up 41%

• Offices up 25%

• Retail up 20%

The surprise in the figures is that, in spite of the pandemic, all sectors are up. Where analysts originally saw decline, all four sectors have shown strength.