At Black Knight, we’re proud to be known as a leading provider of residential mortgage and real estate data to the industry. But this week, we wanted to expand upon a lesser-known asset that we have in our data arsenal: commercial real estate and sales/mortgage data.
We have extensive data assets on all commercial real estate properties in the U.S., along with their historical sales and mortgage data. It’s worth analyzing this data to see any trends that jump out.
Figure 1 below shows overall U.S. commercial real estate median prices dating back to 2000 for the four primary commercial types – office, industrial, retail and multifamily. These are expressed on a sold-price-per-square-foot-of-building-area basis. In the chart, we can see that prior to the pandemic, retail was already being affected by the e-commerce trend that rapidly accelerated after March of last year, when Americans went into lockdown and began avoiding in-person shopping. Prior to the COVID-19 pandemic, multifamily had done the best since bottoming out in 2009.
As one would imagine, the COVID-19 pandemic has impacted each commercial sector in different ways, with office and retail being hit the hardest, while industrial real estate, benefitting from e-commerce trends, has reached all-time high levels. Note the drop in office and retail prices in the second and third quarters of 2020, as many office buildings were closed and people either avoided stores and malls or they simply were not open, depending on the state.
One of the themes we have been discussing since the pandemic began is the move to single family homes for both safety and more space. The latter has evolved into the need for home offices, with many more people working remotely. This will likely be a longer-term outcome of the pandemic and not just a temporary phenomenon – it’s anticipated that many people will be working part time at home, if not full time. This will result in reduced demand for office space and increased demand for larger single-family homes, but these effects will not be ubiquitous across all markets. Larger markets with more high-rise offices, like Los Angeles, will see more of a shift than the smaller and less dense metros.
Figure 2 shows a comparison of office and single-family prices for the Los Angeles core-based statistical area (CBSA). The market appears to be reflecting this scenario with the divergence of the two-price series since the middle of last year. Housing prices reflect not just the low mortgage rates and lack of inventory, but also the need to be able to work at home.
In contrast, as seen in Figure 3, Seattle is an example of a very fast-growing economy, which is serving to offset the impact of the new hybrid office/remote work model. As a result, Seattle office prices have been holding up much better than Los Angeles and other major urban metros.
We’ll be monitoring commercial trends and analyzing what the data tells us about this segment of the industry as the country continues its slow recovery from the pandemic.