As Q1 Closes, the Industry Assesses the Damage

While rent declines have been relatively modest in CRE, one sector is showing more weakness than others.

Vacancy rates for regional and super-regional malls shot up 90 basis points in a single quarter to hit a record 11.4%, according to Moody’s REIS—a significant quarter over quarter increase. One question the broader industry may have is whether CRE performance, after more or less holding up for much of last year, is finally going to show significant signs of erosion. 

It is true that cracks began to emerge in many sectors by November, most notably in regional malls. Outside of industrial, vacancies rose in all major property types and rent declines accelerated at both the national level and across most metropolitan areas.

And it would be natural to expect things to worsen in 2021 since CRE distress usually trails an economic downturn. But overall, the damage has been minimal. “It is likely too soon to pronounce a systematic, definitive recovery across property types and geographic areas, but in general first quarter data reflected relatively benign results,” according to Moody’s.

For example, while rent and vacancy changes for both multifamily and retail were small, they leaned negative. Office posted a vacancy increase of 40 basis points and an effective rent decline of 0.8%, but those were fairly modest drops.

Only four multifamily markets—San Jose (-2.1%), New York (-1.4%), Suburban Virginia (-1.3%), and San Francisco (-1.2%)—posted rent declines of more than 1%, according to Moody’s in Q1. In Q4 2020, 11 metros posted declines of more than 1%. Moody’s said 28 of the 79 tier 1 metros incurred any declines in effective rent.     

In office, 48 of 79 metros suffered effective rent declines in Q1, according to Moody’s. Charleston (-3.5%), New York (-1.8%), and San Francisco (-1.6%) had the most significant declines, while Rochester, Memphis, Knoxville, and Buffalo had effective rent gains of 1.5% or greater.

Retail, which has been dealing with e-commerce disruptions, is struggling a little more, with 40 of 77 metros recording a decline in effective rent in Q1. Still, that is 20 metros less than last quarter. Lexington (-1.7%), Charleston (-1.4%) and Little Rock (-1.3%) were the only metros to fall by more than 1.0%, according to Moody’s.

In most cases, the expected acceleration of stress from the fourth quarter of 2020 never materialized, Moody’s said. Not that the industry has bottomed out, at least not retail and office. Both of these categories are going through structural change which will likely pressure rents and vacancy rates into 2022. Multifamily, by contrast, is closer to its pre-pandemic performance, facing only persistent long-term unemployment and a glut of supply coming online later this year.