Six Reasons For The Surge In Commercial Real Estate Transactions In 2021

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The residential real estate market has received quite a bit of attention over the last two years, and for good reason.

The housing market has become so tight that inventory is extremely hard to come by in nearly every market, and prices are now higher than everĀ for homes. The properties that are listed for sale typically get snatched up in record timeā€”and often sell for higher than asking priceā€”which has made it tough for most buyers to compete.

Case in point: A moderately priced home recently went for sale in Raleigh, North Carolina, and it wasĀ absolutely inundated by potential buyersĀ searching for affordable properties. That mad dash by buyers was enough to make national headlines, but any buyer whoā€™s looked for property in the last two years was almost certainly not surprised by the overwhelming interest. Thatā€™s just part of what buyers face when looking for property in a red-hot housing market.

But the property buying frenzy that has occurred recently has hardly been limited to the residential housing market. Commercial real estate transactions have also explodedā€”with a surprising surge in transactions occurring over the last year. Throughout 2021, investors big and small snatched up everything from apartment buildings, warehouses, and distribution centers to other types of commercial properties, such as hotels. As of the second quarter of 2021, multifamily property sales were up 26% year over year and nonresidential properties were up 16% compared to the year prior.

There were also increases in sales rates across all commercial property types. The rampant demand for commercial properties also led to $193 billion in commercial real estate transactions occurring in the third quarter of 2021ā€”and a record $809 billion in commercial property sales for all of 2021.

So what exactly drove the surge in commercial real estate transactions throughout 2021ā€”and why?Ā EquityMultiple compiled a list of six important trends in the commercial real estate markets during 2021, covering topics from the rise of individual investors to the impact of the federal reserveā€™s pandemic policies. Hereā€™s what you should know.

The lower bond prices caused key bond market indices to postĀ their first losses since 2013, and led investors to look for other ways to put their money to work, which included commercial real estate securities, real estate investment trusts, and other commercial property investments. While potentially risky, commercial real estate transactions can be lucrative for investors, with annual yields averagingĀ between 6% and 12%, with potential for significant appreciation depending on market conditions and other factors. That means investing in commercial real estate has the potential for a significantly higher return on investment when compared to theĀ average return on bonds.

These loans were then converted into commercial mortgage securities, which are offered to individual investors, investment firms, and other financial management companies as shares. By doing this, swaths of investors were able to buy into commercial real estate transactions without having to fund the full purchase of the physical properties or land. Apartment buildings, life science labs, and industrial propertiesā€”which were expected to yield higher returns than other commercial properties, such as shopping malls or retail centersā€”were especially sought after. These types of commercial properties yieldedĀ more than $193 billion in sales during the third quarter of 2021.

In turn, the demand for distribution centers surged, and vacancy rates at these propertiesĀ reached historic lows. That led investors to capitalize on the trend by buying distribution centers and then rake in the profits fromĀ the high lease prices. Rampant supply chain shortages also made it difficult to develop more of these types of properties, which only added more fuel to the fire. Distribution centers and warehouses were suddenly selling for a premium, and investors were willing to pay the price for these properties, which kept transaction rates high.

By purchasing apartment buildings, commercial property investors are able to capitalize on the opportunity to profit from the increased rent prices that occurred. In 2021, rent increased by anĀ average of 11%ā€”or three times the normal rateā€”and it has only continued to increase from there. As of February 2022, theĀ average national rent priceĀ for one-bedroom units was up 22.6% year over year, and two-bedroom rent was up an average of 20.4%.

As such, it can be tough for small investors to qualify, which has led them to set their sights on other options such as real estate crowdfunding, which opens access to commercial real estate transitions and other private fund structures. Another option includes open-ended funds, known as non-traded real estate investment trusts. Non-traded REITs accounted forĀ about 42%Ā of the alternative investment market in 2021, with about $36.5 billion total in fundraising that year alone. Part of the draw is that, unlike most traditional REITs, investors can buy into non-traded REITs for as little as $2,500ā€”and thereā€™s an opportunity for big returns in exchange. Most non-traded REITs have been paying dividendsĀ above 5%, which is competitiveā€”and often beatsā€”other types of fixed-income investments.