WASHINGTON, DC – The National Association of Realtors® identified the top 10 commercial real estate markets for 2021.

NAR selected the top 10 markets after considering 25 indicators on an area’s economic, demographic, housing and commercial market conditions in the multifamily, office, industrial, retail and hotel property sectors. Some of the indicators included GDP growth, unemployment rate, median household income, consumer spending, number of business openings, population growth, homeownership rate, rental vacancy rate, building permits and apartment rent, among other variables.

NAR unveiled the top commercial markets during its first-ever Commercial Real Estate Forecast Summit. The event featured a panel of leading economists who discussed the pandemic’s impact on commercial real estate, including, the multifamily, office, retail and industrial sectors as well as real estate investment trusts, or REITs.

In alphabetical order, the markets are:

• Austin-Round Rock, Texas
• Cape Coral-Fort Myers, Florida
• Charleston-North Charleston, South Carolina
• Las Vegas- Henderson-Paradise, Nevada
• Nashville-Davidson-Murfreesboro-Franklin, Tennessee
• Phoenix-Mesa-Scottsdale, Arizona
• Raleigh, North Carolina
• Salt Lake City, Utah
• Seattle-Tacoma-Bellevue, Washington
• Tucson, Arizona

“The top commercial real estate markets that are expected to outperform the rest of the nation are generally affordable and able to draw new residents with a greater flexibility to work from home,” said NAR’s Chief Economist Lawrence Yun. “These growing markets also offer much lower office and retail rents and are, therefore, able to attract new and expanding businesses.”

Yun predicted that the U.S. economy will continue to improve in 2021 and expects the commercial real estate market will follow.

“A recovering economy and the near certain job growth will steadily lead to the absorption of commercial properties,” Yun said. “The apartment rentals market could once again experience very low vacancy rates by year’s end.”

Calvin Schnure, Nareit’s senior vice president of research and economic analysis, explained that REITs have performed well overall in spite of COVID-19, although some variance exists depending on the market segment.

“The impact of the pandemic on commercial real estate varies widely across property types,” Schnure said. “REITs have been resilient due to their strong balance sheets and liquidity and solid operating fundamentals when the crisis erupted.

“Some sectors have been harder hit, especially lodging, resorts and retail REITs, while sectors that support the digital economy – including data centers, cell towers and industrial and logistics facilities – have enjoyed a surge in demand.”

Gay Cororaton, NAR’s senior economist and director of housing and commercial research, anticipates the multifamily, industrial and retail sectors will drive the commercial real estate recovery this year, but says it may take longer for office occupancies to reach pre-pandemic levels.

“Multifamily and industrial remain the commercial market’s bright spots,” Cororaton said. “With wide differences in commercial and apartment rents across metro areas, development will turn to less expensive markets that are closer to the gateway cities.

“However, office vacancy rates will remain elevated, even with full office-job recovery by the middle of 2022, due to some shifting toward a nationwide work-from-home culture.”

“I expect continued retailer fallout,” added Brandon Hardin, NAR’s research economist. “And as tactical store closures and bankruptcies increase, adaptive reuse and conversions will create opportunities for investors and developers.”

To view NAR’s Top 10 Commercial Real Estate Markets report, visit https://www.nar.realtor/research-and-statistics/research-reports/commercial-real-estate-local-market-reports.  The Tucson report is here.

For more information on NAR’s Commercial Real Estate Forecast Summit, visit https://www.nar.realtor/events/nar-real-estate-forecast-summit.

By: Rick Kleiner, MBA, Principal, Cushman & Wakefield | Picor

The Tucson office market had a strong showing to finish 2020, with 162,000-square-feet (sf) of office space coming off the market during the fourth quarter. Quarterly absorption contracted to negative 19,000 sf from the previous quarter’s negative 181,000-square-feet. The vacancy rate improved by twenty basis points to 9.2% from 9.4%, while the overall average rental rate for the metro area dropped to $20.52 per square-foot (psf), from that of $20.91 psf in Q3 2020. The shift is subtle but shows Tucson office landlords are proactively responding to a changing marketplace, enticing tenants with more advantageous deal terms.

The highest demand was found in the downtown submarket with the lowest activity and demand in Tucson’s east office submarket. The residential market continues to be red-hot in the metro area, indicating activity will spill over into the commercial market, though the metrics do not yet demonstrate the connection. Sales activity remains strong, with medical property sales in northwest Tucson leading all areas of the metro area.

ECONOMY

In January 2021, Arizona lead the nation in the rate of new COVID-19 infections. This correlates with many small businesses closing in the fourth quarter and increased unemployment. Unemployment in the State of Arizona and Pima County rose to 7.8% and 7.9% respectively as compared to the U.S. at 6.7%. The highest rate of unemployment is among 16-19 year-olds with 20.1% and 20-24 year-olds with 9.4%. By educational attainment, unemployment is highest among those with a bachelor’s degree or higher.

Spurred by Remote Work, Business Prioritizes Digital Infrastructure, Fueling the North American Data Center Market

LOS ANGELES, CA – Driven by demand from cloud service providers and large tech companies, Phoenix saw the sixth-most data center leasing in North America in
2020, according to CBRE’s latest North American Data Center Trends Report.

Year-over-year net absorption in Phoenix was 17.5 megawatts (MW) in 2020, up 38 percent from 2019, despite 9 MW of new supply coming online last year. The metro’s vacancy rate of 6.7 percent at the end of last year is the lowest since 2016, while average asking lease rates remained steady in 2020 at $115.

Phoenix has seen increased demand for investment in and development of freestanding data centers with large enterprise customers looking throughout the metro area to purchase assets.  Mesa, in particular, is in the midst of a development boom, with technology and cloud service companies purchasing 480 acres there in 2020 for data center construction. 28.1 MW of supply is currently underway in the Phoenix area.

“The metro Phoenix data center market has really matured over the last 36 months,” said Senior Vice President Mark Krison. “It is now on every radar screen from enterprises to cloud providers. Reasonable land pricing, few natural disasters and competitive power pricing all together provide the perfect storm for companies looking for space and power.”

National Trends

Data centers, one of the fastest growing real estate sectors pre-pandemic, remained strong in 2020 as businesses reconfigured their digital infrastructure to improve their remote work capabilities, and tech giants and cloud service providers raced to meet consumer and corporate demand, according to CBRE.

The firm’s latest shows 329.6 MW of net absorption in 2020 across the seven primary U.S. data center markets. While down 11 percent from the peak in 2019, 2020 absorption was still higher than any other year on record. Meanwhile, vacancy fell to just 8.5 percent, despite an 11 percent growth in new supply.

“With data usage growing at an explosive rate, we expect data center demand to increase across both primary and secondary markets in 2021,” said Pat Lynch, Senior Managing Director, Data Center Solutions, CBRE. “To capitalize on this growth, data center providers will look to deliver network and interconnection offerings to better connect business-critical applications, as well as to meet anticipated demand for evolving technologies like 5G, Edge computing and the internet of things—all of which will further fuel the data center real estate market.”

Top North American Data Center Markets

Strong demand and an uptick in investor interest in direct investment due to the strong performance of data center REITs in 2020 resulted in a 457.8-MW data center construction pipeline in the primary markets, up 62 percent from the end of 2019. More than half of the current pipeline is pre-leased.

Other markets with significant construction pipelines include Montreal (57 MW), Silicon Valley (50.1 MW), Central Washington (43.7 MW), Hillsboro, Oregon (40.5 MW), and Chicago (33.7 MW).

• The seven primary U.S. data center markets are Northern Virginia, Dallas, Silicon Valley, Chicago, Phoenix, New York Tri-State and Atlanta.

Read full report here