Commercial Magazine

Michael Knott, Green Street Advisors

Nontraditional sectors are shining bright in the market

By Jeff Bond

During the COVID-19 pandemic, some nontraditional sectors of commercial real estate have stood strong, including manufactured-home parks and grocery store-anchored strip centers, to name a few. That is the findings of recent reports by Green Street Advisors, a Newport Beach, California-based firm that focuses on research and advising for commercial-asset owners and real estate investment trusts (REITs).

The firm has created a Commercial Property Price Index (CPPI), which captures commercial real estate pricing at the level that transactions are being negotiated and contracted. Green Street reports that they expect the self-storage and industrial sectors to continue their strong growth through 2022. They will be joined by some smaller sectors that rarely receive the investor spotlight, such as manufactured-home parks and strip shopping centers. This past March, Green Street’s Michael Knott spoke with Scotsman Guide about the trends his company is tracking in the storage, industrial and retail sectors for 2022.

Self storage was in a bit of a rough patch prior to COVID-19, but the pandemic released significant demand growth.

In 2021, your CPPI showed the largest increases in values in the self-storage and industrial sectors. Why do you expect these two sectors to continue growing this year?
Largely because of the unprecedented strong fundamentals in both property types. Self storage was in a bit of a rough patch prior to COVID-19, but the pandemic released significant demand growth. It’s been a fantastic environment of rapidly rising rents, all-time high occupancies and really strong cash-flow growth. Different factors have come together to really turbocharge the values of those properties. It is a similar story with the industrial sector, where there are virtually no vacancies. Many markets are sold out of industrial space. The investor interest in the industrial sector continues to be off the charts.
But when you talk about the industrial sector, what type of properties are growing the fastest?
Bulk warehouses are one property type. Others include properties that are utilized for the distribution of goods in the logistics sector of the economy, which benefited from strong retail sales in 2021 that were about 20% above 2019 levels. Also, the industrial sector was very strong before COVID because of the tailwinds from e-commerce expansion. We had record rent growth in both property types last year and we don’t see that slowing down too much this year. The outlook remains quite good.
Another sector where you are seeing major growth is manufactured-home parks. In fact, it has the strongest growth of any sector in the CPPI.
You don’t hear a lot about it, but this has long been one of our favorite property types. It’s a sector with very low supply growth and the capital that you have to reinvest into your properties is quite low. Also, over the past few years you’ve had very strong demographics that support demand. The results are that these properties have generated really high growth and capitalization rates have declined significantly.
All those factors add up to a really great business. In many ways, it still has a very good outlook for 2022, but it’s clearly been repriced and it’s no longer sneaking up on people. Investors love the product. They can’t find enough of it to buy and allocate their capital to it. Clearly, the secret has been out for some time.
On the retail side, Green Street is bullish on strip retail properties, another commercial sector you don’t hear much about.
Right. This retail sector has been surprisingly good. Part of that is because retail sales have been stronger than a lot of folks anticipated. The grocery-anchored centers have done well during COVID. We have also seen strong sales from the power centers (large outdoor shopping malls), which are anchored by the bigger national retail chains. They have raised a lot of capital and grown brick-and-mortar sales. So, the whole strip-center continuum seems to have done relatively well.
In your most recent report, office space remains the laggard, with the slowest growth rate of any commercial real estate sector. Do you see that continuing?
It feels like one of the lasting impacts of COVID is the rewriting of the social contract, if you will, between employers and employees in terms of how to structure their workweek. And the office is a bit of a casualty from that process. Coming out of the pandemic, leasing markets are very slow and vacancy rates are pretty high. There’s a very strong trend that quality wins. … So, we believe the high-quality spaces with amenities, green features and a focus on employee wellness will continue to be the clear winners in the office space. ●


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