Nearly 90% of all commercial industrial real estate transactions happened on time in Q4 2021, while just 4% were canceled. This is according to the latest results of the Society of Industrial and Office Realtors® (SIOR) Snapshot Sentiment Report, which provides feedback from hundreds of member-brokers on the performance of transactions during Q4 2021, along with their outlook for the next six months.
At the start of 2021, many were optimistic about an end-of-year rebound. And then the summer wave of cases arrived, then supply-chain disruptions and skyrocketing prices, and then Omicron. Industry conditions have been slowly recovering since the onset of the pandemic, but both industrial and office brokers continue to scramble to secure amenity-rich properties, as well as any available land and development opportunities they can find.
In terms of overall industry confidence, members shared an average rating of 8.2 (out of 10) which is a new all-time high for the Report. The rise is fueled by a continued boost in confidence among industrial brokers (7.7, also a new high) and increased confidence among office specialists, rated at 6.4 in Q4, compared to 6.2 in Q3 2021.
Office brokers did see a reduction in on-time transactions, dropping to 69% in Q4 2021 from 75% in Q3 2021. This is a continued downward trend since the sector enjoyed a high of 77% in Q2 2021. Brokers say the pandemic’s ongoing volatility brought on by the Omicron variant has pushed back the much anticipated “return to the workplace” and as a result, many office tenants are still hesitant to move forward.
Industrial continues its positive trajectory, as 80% of brokers reveal transactions are either much or a little higher than the previous quarter, compared with only 2% who said it was lower in Q4 2021.
“COVID is still keeping tenants guessing as to the amount of space they’ll need going forward,” says a leading Florida-based SIOR office broker. “Will all employees return to the office? Only some employees? What frequency? Will they need offices, or will they use workstations? It’s still very much up in the air.”
When asked about the office sector’s return to pre-pandemic levels, one member replied, “We are hoping to see the market in full swing by July 2022 or October 2022.”
And as 2022 begins, SIOR brokers are settling into a new version of normalcy.
“Everyone is waiting for the next chapter in the pandemic story,” says SIOR CEO Robert Thornburgh, SIOR. “But what the Report ultimately reveals, is that the ongoing uncertainty isn’t slowing down the markets’ top brokers. These are the experts who are prepared for anything, who remain fluid and agile, and can respond quickly to what’s happening - instead of being married to one idea or plan. This is about delivering the very best service and opportunities for their clients, no matter the circumstances.”
In terms of overall leasing activity for industrial and office members, things remained positive in Q4 2021, with 60% of all office members saying that leasing was either a little or much better than in Q3. Only 6% say it was much lower.
But the Report also shows inventory, for both sectors, is becoming a challenge. A Nevada-based office expert says, “There is little office available in our market. Space is not in the desirable markets, therefore, good space in a hot market is seeing fast lease-up and higher rates.”
On the state of the office market, SIOR’s Global President Patrick Sentner, SIOR, notes, “Most of the office growth has been with Class ‘A’ and ‘A+’ buildings, which are receiving strong rent growth and longer terms in exchange for higher work-letters and more up-front rental abatement. Companies are looking to hire, and they know that quality office space offering amenities and location is one of the biggest factors in attracting high-level employees.”
On the industrial side, members say the lack of supply continues to drive a dramatic rise in rents that many predict will keep climbing into 2022.
“One challenge is representing tenants who are seeing sticker shock as rental rates have escalated 50% above the rate they were paying,” reveals a member in the Washington, D.C region. A Los Angeles industrial specialist agrees, saying, “Prices just keep getting higher and higher and there is more new money investing in industrial.”
Industrial brokers across the nation say vacancies are “historically low” and the lack of inventory is fueling the country’s supply chain issues. To compound the challenge, delays in the construction industry are preventing new properties from coming online fast enough to overcome demand.
As the industry begins a third year of the pandemic, the one constant that has continued to reveal itself is that SIOR brokers are uniquely positioned to find success, despite the changes, volatility, and ambiguity seen over the past two years.
“Embracing change is the most common and important trait of a true leader in today’s market,” adds Thornburgh. “The Omicron variant is the latest wave of disruption, but it certainly won’t be the last. Having a plan isn’t about trying to predict the future. It’s about being prepared to adjust and take advantage of whatever the future throws your way. That’s just a small part of what makes SIOR members the best at what they do.”