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Commercial Mortgages: Much of commercial real estate continues to surge despite delta variant
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Commercial Mortgages

Commercial Mortgages: Much of commercial real estate continues to surge despite delta variant

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Led Zeppelin likely was not talking about economic forecasters in “Dazed and Confused,” a song the rock band made famous in its 1969 debut album, but the title aptly describes the dismal science today.

During the pandemic, it was clear that the new case curve of COVID-19 would dictate how the economy responded. As the vaccine reduced new cases, the economy roared back to life. There were clear winners from the lockdown and clear losers.

For real estate investors, the clear winners were industrial property owners and, in many markets, apartments. Retail properties and hotels were clear losers, and office properties were stuck in a sort of purgatory.

As pandemic fears started to go away, consumers began to spend heavily on experiences, eating out and traveling. The clear beneficiaries were hotel owners and retail properties. Office property owners continued to eye a return to normalcy, with Zoom trending down and meeting in-person and hybrid models on the rise.

Now, the curve is back with the rapid spread of the more contagious delta variant of the coronavirus. Besides Nebraska, every state in the country is at a “high” or “substantial” level of community transmission, according to the U.S. Centers for Disease Control and Prevention.

Retail sales dipped in July, and consumer confidence waned. The Federal Reserve is trying to calm the markets by telling everyone inflation will be transitory, but a new playbook is getting written every day.

While there are very few certainties in commercial real estate, there are some constants with or without COVID. Low interest rates tend to lead to lower cap rates and higher values for income-producing properties. Rates are still low and in the 2.75% to 3% range for 5- and 10-year loans backed by conservatively leveraged properties, according to the John B. Levy & Co. Inc. national mortgage survey.

The super-low interest rates have allowed cap rates on apartment building to drop to previously unseen territory. Nationwide, apartment cap rates have fallen 0.44% since last year and now average 5.04%, according to a second-quarter report by commercial real estate brokerage CBRE. In Richmond, cap rates are lower than the national average based on the past few blockbuster trades.

Industrial properties continue to be the other hot property, according to recent research from commercial real estate association NAIOP.

Net absorption for 2021 is forecast at 329.5 million square feet, which is 50% greater than the average net absorption over the past seven years. The net absorption for 2022 is expected to be even stronger, making industrial properties a clear winner regardless of the COVID curve as the pandemic laid bare the need to have inventory for producers, which means more space.

Despite some hesitancy related to the future, market activity in all property types is still very strong across the country and in Richmond.

The latest deal in Richmond’s Scott’s Addition for a 53,392-square-foot building at 1300 Mactavish Ave. closed at an eye-popping $6 million per acre — or a total of $10.8 million. The 1.81-acre property takes up much of the block between West Marshall and West Clay streets along Mactavish Avenue.

That acquisition makes the purchase of 3.3 acres on North Arthur Ashe Boulevard by Level 2 Development and SJG Properties for $12.5 million a relative bargain. The developers plan a 300-unit apartment complex along with retail space on the land where Buz and Ned’s Real Barbecue and other businesses are now.

John B. Levy & Co. partner and investment banker Andrew Little can be reached at alittle@ jblevyco.com.

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