SIOR Sentiment Survey Reveals a Gradually Improving Commercial Real Estate Market

You wouldn’t know it by reading headlines like “The Office is Dead” or “Commercial Real Estate is Headed For a Crash”, but when you talk to the nation’s best brokers, you hear a decidedly upbeat tone regarding the state of North America’s office and industrial sectors. For the past six months, the Society of Industrial and Office Realtors (SIOR) has been conducting a comprehensive survey of its members, all of whom are considered to be among the very best in the world. And though they would conclude that the pandemic has created some incredible challenges and unforeseeable problems, September’s survey results reveal an industry that is not just surviving, but improving, even as we continue to contend with a global crisis.

What A Difference Six Months Makes

SIOR released its initial Snapshot Sentiment Survey report in April, and at the time, the outlook for the market was anything but rosy. More than 500 members, comprising both office and industrial sectors, responded to the survey. They shared that 31.6 percent of transactions had been put on hold by clients, third parties were driving 25.1 percent of delays, and an additional 17.1 percent of deals had been fully cancelled. Worse yet, only 26.1 percent of transactions had actually been completed on schedule. The challenges for office were slightly higher, while the industrial sector was faring slightly better.

But in just six months, the situation has improved dramatically. In September’s survey, on-time deals had doubled, comprising 56.7 percent of all transactions, while the number of deals put on hold (16.2 percent) or cancelled outright (8.1 percent) had been reduced by half. While those numbers are not spectacular when compared to the past four years of historic growth, they certainly do not subscribe to the idea that commercial real estate, particularly office, is laying six feet under. By tracking the data during the entire course of the pandemic, SIOR members, who need to be active as CRE brokers for five years while achieving demonstrated track records of success, have been able to provide a ‘boots on the ground’ perspective on leasing and sales activity that no other survey has been able to deliver during the pandemic.

“There’s a lack of velocity for deals being done right now, but at the same time, there’s a lot of discussions about transactions,” says Jeff Deitrick, SIOR, and executive VP for Pittsburgh-based Oxford Realty Services. “If you look at our production numbers, yeah, they’re down, but they’re not down drastically. Corporations are taking a ‘wait and see attitude’, but I see that going away once a vaccine is found, we’re past the elections, and people understand what the path is moving forward.”

“A Lot of Deals Are Just Continuing On”

Taking a closer look at the office market, which has taken significant hits as work-from-home becomes more common, broker confidence has been growing steadily since April’s initial survey, although the degree of optimism varies by region. Overall, broker confidence has risen from 6.04 (on a 10-point scale) in April to 6.57 in September. There are significant regional discrepancies however, with the Northeast (4.8 office, 6.7 industrial) and Canada (4.7 office, 5.0 industrial) recording the lowest levels of confidence, and the Mid-Atlantic (6.3 office, 7.3 industrial), Northwest (6.8 office, 7.2 industrial) and Southeast (6.1 office, 7.3 industrial) the highest. In only one region did office confidence exceed industrial, the Southeast (7.1 to 6.6), where one respondent in the North Texas market remarked, “A lot of deals are just continuing on as though everything is normal in the world.”

An Industrial Boom Like No Other

While improving, the future of office is still quite uncertain. But for the industrial sector, an already hot market may actually be performing better now than it was pre-COVID. Brokers report low vacancies, rising rents, and an active sales market. As one respondent stated, “I have never been happier to be an industrial broker.”

Dramatic demand from the e-commerce market is beginning to eclipse what’s currently available. As space grows scarce, one broker in the Philadelphia market says that prospects and clients are now considering flipping retail space for light industrial/warehouse use. Further discussion with brokers across the country reveals this is a trend that appears to be gaining momentum as Amazon rushes to open more distribution centers. But according to Christian Caulum, SIOR, and VP of commercial brokerage for the Oakbrook Corporation, headquartered in Madison, Wisconsin, e-commerce is not the only driver. He says the pandemic has had a direct impact on industrial inventory in his market. “We already had extremely low vacancy, but COVID has only exacerbated that.”

In Caulum’s estimation, the market has been driven by three types of users: Those who store PPEs including hospitals, the National Guard and third party providers; the COVID supply chain (producers of ventilators and testing products); and those in the construction supply chain, which continues to expand.

Office’s Big Comeback

Yet as the industrial sector shows no signs of relenting (especially as the holiday shopping season approaches), Deitrick acknowledges that the office market is unlikely to show significant gains until a vaccine is introduced, coupled with an effective distribution network. But despite this, he remains optimistic.

“You’ve got naysayers out there saying the office is going away—it’s not going away,” he affirms. “The office will always be there. It’s just a matter of how the office will be designed and how corporations move forward with that.”