Commercial real estate mostly holds steady, for now

The Northeast Ohio commercial industrial real estate market hasn’t changed much since before the pandemic. Prior to the start of the year, office and industrial property values were very strong, industrial especially, and the outlook for them was continued strength and growth. Retail had a similar outlook, but not as strong as other property categories because of the competition brick and mortar has been facing from ecommerce.

Overall, there was a very positive outlook heading into 2020. And though many businesses have been disrupted by the pandemic, values have generally held steady, though there are weak spots in some sectors that could worsen if the recession continues.

Smart Business spoke with Simon Caplan, SIOR, a partner at Cushman & Wakefield/CRESCO Real Estate, about the state of the Northeast Ohio commercial real estate market and what the remainder of 2020 could bring.

How has the pandemic affected Northeast Ohio commercial real estate?

There are a lot of people in the market looking for industrial properties and they’ve been faced with a shortage of functional available space for lease and quality buildings for sale. Fortunately, there was a lot of new construction started last year that is occupiable this year. It is being gobbled up by companies that are doing well and need more space for manufacturing or distribution.

The office market has been negatively affected. Most companies have been very slow to address leases that are expiring this year or next year. There is some lease renewal activity, but instead of wanting to renew for five years, they’re more likely signing for one or two years. Occupants are making fewer improvements to their space because of these short-term leases, instead wanting flexibility for the future.

What’s happening when it comes to lease agreements?

Most companies want to do shorter terms. They want the flexibility. And if they’re taking ‘as-is’ space, they can get short-term deals. Landlords who normally are looking for five- to 10-year leases are now willing to do two-year deals with tenants, especially if it’s a lease extension with a business currently in the space. Tenants, in many cases, are looking for rent concessions or are negotiating to renew leases at their current rent or below to avoid the normal increases that tend to come with renewals.

Ultimately, landlords still have to make their mortgage payments and generate a little bit of a profit. That’s been made more difficult recently because there are tenants who haven’t been able to pay their rent for a few months. In some cases, lenders are working with landlords that can prove that they have not been receiving full rent and are accepting lesser payments on those mortgages.

How has the pandemic affected commercial real estate investors?

Overall, there’s significant demand. There’s still solid interest in industrial where prices, at the moment, are holding steady. There is also a lot of interest in vacant or about to be vacant big box retail space for repurpose uses. However, there are categories that are slowing down. In those sectors, prices are getting depressed.

Interestingly, the vacancy rate in Northeast Ohio’s industrial sector was just under 4 percent at the end of 2019 and reached 4 percent at the beginning of the year, where it has stayed. There hasn’t been any negative absorption — absorption being the amount of occupied square footage.

What’s the outlook for Northeast Ohio commercial real estate for the rest of 2020?

Industrial should stay strong, in part because it’s propelled by ecommerce right now, which is definitely going to continue to thrive. The office market this year is on pace to experience negative absorption for the first time since 2009. It’s unlikely that anything that happens in the second half of the year is going to change that.

And there is no doubt that retail is changing. Operators in that sector are going to have to adapt quickly, or real estate in that category will see significant price decreases. Right now, it’s not wise to buy into that sector unless it’s an amazing deal or it’s a subcategory like grocery that’s resilient.

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