U.S. commercial real estate Q4 2020 review and outlook

Our U.S. commercial real estate outlook reveals the latest across the markets for investment, office, industrial, and multiresidential properties. Learn more.

U.S. economy at an inflection point

In Q4 2020, the impact of renewed lockdowns and social distancing measures stalled the economic recovery. Notably, in November consumer spending contracted, while in December employment gains ceased as non-farm payroll turned negative for the second time that year. While the economy’s near-term growth will likely continue to be held back by the resurgence of COVID-19, we expect to see a pickup of positive economic data in the second half of 2021 as warmer weather and the vaccine rollout take hold.

Growth in the first half of the year is likely to be uneven across different industries and economic groups. While manufacturing and construction should continue to perform well, the services sector, especially accommodation and food service, will remain under duress and operate at limited capacity.

Over the course of 2021, monetary policy is likely to stay highly accommodative with the U.S. Federal Reserve continuing to pursue quantitative easing and maintaining its key policy rate at the current level. This low interest-rate environment should further sustain asset values, consumer spending, and business investment.

Consumer spending index (Index January = 100)
this chart shows the CPI Index for goods and services. While both goods and services dropped significantly early 2020, only the good sectors has recovered.
Source: U.S. Bureau of Economic Analysis, Manulife Investment Management, as of December 23, 2020.
Unemployment rate (%)
this chart shows the unemployment rate. After hitting a decade high of almost 15%, the unemployment rate has fallen, but continues to remain above pre-pandemic highs.
Source: U.S. Bureau of Labor Statistics, as of January 8, 2021.

Q4 market review and Q1 2021 outlook

Investment markets¹

Investment markets in the United States have been on a gradual road to recovery since mid-year when reported sales volumes fell to their lowest level in the past ten years. Compared to the global financial crisis (GFC), the current downturn has been much less severe, with transaction volumes down by about 30% in 2020. This pales in comparison to the 2009 downturn when investment markets came to a near halt and transaction volumes fell by 90% relative to their peak. A critical difference between this downturn and the GFC is the impact on the commercial mortgage market. In the aftermath of the GFC, unavailability of debt financing caused by the evaporation of the commercial mortgage-backed securities market led to years of limited deal activity and falling prices, as bad loans were worked out over time. In the current downturn, the pressure on asset prices has been driven by net operating income erosion as a result of rent concessions and slower rent growth rather than increases in investment rates.

The multifamily sector has garnered the highest investment interest over the past five years and is still trending in this direction throughout the current pandemic. Multifamily assets were the chief beneficiaries of investment activity in 2020 at $132 billion, close to 40% of total transaction volume. Industrial has also been a favorite asset type in recent years, with the pandemic only increasing its investment appeal. It stands as the second most active property type in 2020, with investment volumes at $96 billion.

Economic uncertainty has clearly played into real estate capital valuation, but aside from the retail and hotel segments, which were both hit hard by pandemic social interaction restrictions, the impact to capital values has therefore far been on the mild side. As expected, stronger investment demand has led to better pricing for multifamily and industrial real estate, which continue to enjoy capital value stability.

Quarterly transaction volumes (US$ billion)
this chart shows quarterly transaction volumes. While commercial real estate transactions have improved, they are still well below 2019 highs.
*Preliminary data
Source: Real Capital Analytics (RCA), as of Q4 2020.

Office markets¹

Demand for office space plummeted in 2020 as business closures and widespread work-from-home initiatives left a sizable share of office space empty for most of the year. Office net absorption fell to negative 75 million square feet (SF) in 2020, the largest one-year occupancy loss on record. Even as mandated work restrictions and social distancing limitations held construction in check, we saw some renewed activity with developers managing to complete 46 million SF of net new office space over the year. This new supply combined with weak demand pushed average vacancies up 140 basis points (bps) to 11.20%.

Office supply/demand fundamentals
bar chart of office supply and demand
Source: CoStar, as of Q4 2020.

Facing weak demand for leasing, landlords are competing hard for tenants to maintain occupancy levels and as a result average national office asking rents fell by 1.10% in 2020. It’s clear that office rents will likely remain under pressure over the next 12 months, although the impact is likely to vary by building class. It’s possible new value placed on employee health and well-being could translate into greater interest in high-quality, well-located assets. Rents and occupancy levels for those assets may show more resiliency compared to the rest of the market.

Office rent growth (%)
this chart shows office rent growth which has been on the decline since the mid-2010’s.
Source: CoStar, as of Q4 2020.

While the recovery saw construction activity relatively constrained, it has nonetheless been trending upward in recent years reaching 157 million SF by the end of 2020—equivalent to 1.90% of total current office inventory. The tech hubs are appropriating most new projects—Austin, San Jose, San Francisco, and Seattle—locales better positioned to return to the upswing and absorb new supply once the economy starts to reenergize. However, faced with weaker demand and challenged by difficult logistics, the pace of new project completion will likely decline in the near term. This could have the benefit of reducing the impact of new supply on the market.

Office under construction as % of stock
this chart shows office supply which has been gradually increasing since ~2010.
Source: CoStar, as of Q4 2020.

Changes in office workspace planning are a risk factor for the sector, although it’s not clear whether demand for office space will be substantially affected. The widespread work-from-home experiment prompted by COVID-19 is proving that many employees can continue to work from home and still be productive. While we do envision employers will generally be more flexible around the employee workplace arrangement, it’s unlikely the role of the physical office in company operations will diminish. Priorities such as preserving a firm-wide culture and maintaining collaborative/creative functions are advanced by having employees under one roof, and the right office space can help attract talent, establish credibility, and provide prestige. Furthermore, changes in workspace planning—de-densification of office space and increased provision for social/collaborative space—should offset some of the impact of the expanded work-from-home arrangements. We also expect some structural shift in demand balance as the desire for shorter commutes and economic constraints could give a boost to suburban markets.

Industrial markets¹

The surge in online shopping continues to foster demand for industrial real estate. Competition over shorter delivery means that retailers must build out their distribution network, and this has been especially beneficial to warehouse properties near dense population centers. The pandemic has only accelerated this trend and encouraged demand for industrial space despite the economic slowdown.

Industrial market net absorption appeared unaffected by this downturn, in fact growing by 27% in 2020 to 204 million SF. The pandemic has also done little to slow the steady pace of new supply with annual net completions of 290 million SF—the highest on record. 

Industrial supply/demand fundamentals
this chart shows industrial supply/demand fundamentals. Even with new supply entering the market the vacancy rate stayed steady in 2020.
Source: CoStar, as of Q4 2020.

Construction remains elevated at near historic highs. At the end of 2020, there was 325 million SF of industrial space being built, equivalent to 1.90% of the total market. 

Industrial under construction as % of stock
this chart shows the steady increasing supply of new industrial properties under construction in the market.
Source: CoStar, as of Q4 2020.

New supply, however, is concentrated in a handful of national and regional distribution centers, with the top five markets accounting for a third of all new builds. This upward trend over the past two years has helped reduce supply-and-demand imbalances, as well as gradually moderate industrial rents. Economic unpredictability has only given a push in this direction, limiting overall rent growth to its lowest since 2013 at 3.70%

Industrial rent growth
this chart shows industrial rent growth which has been on an upward trajectory since ~2009.
Source: CoStar, as of Q4 2020.

The real bright spot is that the steady build-out of retail distribution networks and e-commerce fulfillment platforms has helped bolster demand for industrial space, from both existing and new tenants. Large-bay, high clear height warehouse space, as well as smaller, lower clear height facilities near urban areas that can serve as last-mile delivery stations are the key beneficiaries of e-commerce-related demand. 

Industrial real estate could also see a demand boost driven by structural changes in manufacturing and supply chains. With COVID-19 challenging global trade and supply chain networks, for example, businesses are likely to turn to local manufacturing and the build-up of inventories in nearby markets. These innovations could be net positive demand drivers for industrial real estate in the long term.

Multifamily markets¹

A sharp third-quarter rebound helped stabilize demand for multifamily residential on a year-over-year basis. This turnaround originates from pent-up demand during the first half of 2020 when pandemic lockdowns greatly slowed down leasing activity. However, 2020’s near-record new supply of 423,000 units has put some pressure on the vacancy rate which rose by 40bps to 6.90%.

While demand for multifamily tends to be less cyclical than other property types, recent job losses and social distancing measures may continue to affect leasing activity going forward, although the impact to different product types will likely be uneven. Economic constraints combined with here-to-stay workplace flexibility may shift some demand away from expensive high-end urban-core stock to suburban products that offer larger and more affordable units. High-priced urban accommodation also faces competition from new supply that may further pressure occupancy and rent growth in that segment

Multifamily supply/demand fundamentals
this chart shows multifamily supply/demand fundamentals. With new supply entering the market the vacancy rate hit a 5 year high in 2020.
Source: CoStar, as of Q4 2020.

Overall, the outlook for multifamily is on the plus side. The federal government’s relief package included direct payments to low-income households, which is helping to cushion the impact on multifamily rental income. Multifamily rental also benefits from several secular demand drivers that are moderating occupancy volatility: an overall shortage of housing options, home ownership affordability issues, and demographic trends such as an increase in both the median age of marriage and the number of single-person households.

National average multifamily rents were relatively flat in 2020. Average figures can be deceptive, however, as they mask variations across product types such as expensive high-end urban-core products, encumbered with less favorable supply-and-demand conditions, are experiencing rent pressure, while cheaper suburban products are showing greater rent stability.

Multifamily rent growth (%)
this chart shows multifamily rent growth which held flat in 2020.

Source: CoStar, as of Q4 2020.

Even as construction activity experienced a slowdown over the past year, near historic highs still prevail. As of the end of 2020, there were 556,000 units under construction, equivalent to 3.20% of current stock.

Multifamily under construction as % of stock
this chart shows construction activity in the multifamily has slowed down in 2020 but remains above 3% of current stock.
Source: CoStar, as of Q4 2020.

1. All market fundamental statistics, including vacancy, absorption, completion, under construction, and rent growth sourced from CoStar, as of Q3 2020. All capital market statistics, including transaction volumes, cap rates, and price index sourced from Real Capital Analytics, as of Q4 2020.

Information in this document may be sourced from Real Capital Analytics. ©2021 Real Capital Analytics, Inc. All Rights Reserved. 

CoStar disclosure

CoStar Group, Inc. and its affiliates (collectively, “CoStar”) have assumed and relied upon, without independent verification, the accuracy and completeness of such third party information in preparing these materials. The modeling, calculations, forecasts, projections, evaluations, analyses, simulations, or other forward-looking information prepared by CoStar (“CoStar”) and presented herein (the “CoStar Materials”) are based on various assumptions concerning future events and circumstances, all of which are uncertain and subject to change without notice. Actual results and events may differ materially from the projections presented. All CoStar Materials speak only as of the date referenced with respect to such data and may have changed since such date, which changes may be material. You should not construe any of the CoStar Materials as investment, tax, accounting or legal advice.

CoStar does not purport that the CoStar Materials herein are comprehensive, and, while they are believed to be accurate, the CoStar Materials are not guaranteed to be free from error, omission or misstatement. CoStar has no obligation to update any of the CoStar Materials included in this document, Any user of any such CoStar Materials accepts them “AS IS” WITHOUT ANY WARRANTIES WHATSOEVER, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY, NON- INFRINGEMENT, TITLE AND FITNESS FOR ANY PARTICULAR PURPOSE. UNDER NO CIRCUMSTANCES SHALL COSTAR OR ANY OF ITS AFFILIATES, OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS, BE LIABLE FOR ANY INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES WHATSOEVER ARISING OUT OF THE COSTAR MATERIALS, EVEN IF COSTAR OR ANY OF ITS AFFILIATES HAS BEEN ADVISED AS TO THE POSSIBILITY OF SUCH DAMAGES

Manulife Investment Management

A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.


Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.


The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.


This material, intended for the exclusive use by the recipients who are allowed to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by, and the opinions expressed are those of, Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.


Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.


Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.

This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional.


Australia: Hancock Natural Resource Group Australasia Pty Limited., Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad 200801033087 (834424-U) Philippines: Manulife Asset Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.

Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

531895

Matthew S. Warner

Matthew S. Warner , 

Portfolio Manager, Real Estate Equity

Manulife Investment Management

Read bio