At Bottom This is Still a Market-By-Market Recovery

Things are looking up for both the American economy and the commercial real estate market.

But digging down a little deeper, the pace of recovery varies by market.

“There’s a lot more under the surface when it comes to the recovery from the health crisis,” John Chang, senior vice president and director of research services at Marcus & Millichap, said in a recent video. “The impact of the pandemic varied greatly from one part of the country to the next. And as a result, some cities and states have much more ground to recover than others.”

Chang points to New York City, often cited as a market that struggled through the pandemic. However, while the city has begun to recover, it is still down 500,000 jobs compared to pre-pandemic levels. At the other end of the spectrum, Chang pointed to Salt Lake City, the only city that saw job growth during the pandemic, whose employment has actually increased by 13,000 more jobs since February of 2020.

“Because the pandemic has impacted each city in a very different way, commercial real estate faces very different situations in each metro,” Chang said.

The apartment market provides a revealing glimpse into how the recovery varies by market. While the Q1 2021 vacancy rate was 4.5%, which is just 10 basis points higher than Q1 2020. However, various cities have much higher vacancy rates. For instance, Chang says they are up 260 basis points to 6.2% in San Jose, California. However, the vacancy rate in Riverside-San Bernardino, California, is down by 190 basis points to 1.8%. Chang says that is the lowest vacancy rate that the market has seen in 20 years. In San Jose, rents are down 16.2%, while they were 11% in Riverside-San Bernardino rents.

Chang also points to rents rising in Sacramento (7.4%), Phoenix (6%), Detroit (5.3%), Tampa (5.3%), Jacksonville (4.9%) and Las Vegas (4.9%). On the other hand, rents are falling in San Francisco (-9.5%), Boston (-8.3%), Oakland (-7%), Seattle (-6.1%) and Chicago (-5.7%).

“Just because a market took it on the chin during the pandemic doesn’t mean these cities should be counted out,” Chang says. “The post-COVID recovery could be very swift in some of these cities.”

While retail numbers don’t differ as much as the apartment figures, they are still pretty dramatic, according to Chang. Overall, US retail rents are down 0.2%. However, they are up in Las Vegas (6.9%), Seattle (5.3%), Columbus (5%), Indianapolis (4.6%) and Philadelphia (3.8%). On the other hand, retail rents have fallen in New York (-8.4%), San Francisco (-6.4%), Oakland (-5.7%) and Milwaukee (-5.7%) and Riverside-San Bernardino (-4.6%).

While office vacancy rose 310 basis points in the last year, markets like Denver, Las Vegas, St. Louis, Kansas City, Orlando and Atlanta delivered modest rent increases of between 1.1% to 1.7%, according to Chang. Gateway markets like New York, San Francisco, Seattle and Boston were hit much harder.

“We cannot overlook the little local details in the post-pandemic recovery,” Chang says. “The variance from market to market is just too significant.”