Guest column: On the slow road to recovery
Despite positive signs with commercial real estate in the Fargo region, recovery in the office market is going to be slow
I believe it is safe to say that no one could have predicted the types of market swings we would see over the past 18 months since COVID first shut down our region in March 2020. There have been bright spots and low spots to be sure, and where exactly things may go in the next 18 months is far from guaranteed.
History can be a helpful guide to look to the future, however, so let us examine what has happened locally across three of the major markets we closely monitor.
Much has been written nationally about the “end of the office” given the high number of employees still working from home, more employers offering flexible work schedules, etc. Certainly, the pandemic has had an impact on the office market here in the Fargo-Moorhead region, much like it has across the country.
Since March 2020 for example, total office inventory for lease is up 10.7%, unique listings are up 8.3%, and overall leasing volume is down.
While those are tough results, the picture is not all doom and gloom, however. For example, the volume of monthly office leasing activity has been steadily increasing since February 2021. Also, average asking rents are UP since COVID hit, driven largely by an increase in new Class A inventory hitting the market.
These are positive signs, yet the road to recovery in the office market is going to be a longer, slower ride than some may like. We stand at just over 1.2 million square-feet of office space for lease in the metro as of early September, which represents over four years of inventory at current leasing volumes. I expect the local office inventory to continue climbing at a moderate pace for a few more quarters at a minimum.
Without question, the industrial market has been the Belle of the Ball since COVID hit and it has shown no signs of slowing down. The forces behind the explosion in demand for warehousing and distribution space are not going away anytime soon it seems.
It was about this time of year in 2019 when industrial inventory hit a high of 1.5 million square-feet for lease. Fast forward to July of this summer when we hit a low point of just under 700,000 square-feet for lease. By our best estimates, this represented a vacancy rate of around 2% metro wide, a number this market has not seen in a very long time.
Not surprisingly owners and investors have taken note and new industrial projects are now coming out of the ground, leading to a new trend of increasing industrial inventory. We knew these projects were coming and that inventory would start to rise, so one should not take this spike as a sign of trouble. As leasing demand continues to be incredibly strong, we are bullish these new industrial projects will find tenants sooner than later.
The retail market has shown similar trends to the office market, yet has its own set of opportunities and challenges in the months and years ahead. After seeing a significant rise in retail inventory for the first nine month of COVID, inventory levels have started to come down consistently since the start of 2021.
Not all the inventory decrease has been driven by leasing activity, however, as some owners have decided to pause their marketing efforts or in some cases have sold vacant buildings that have yet to come back on the market for lease (a trend in the office market as well).
That is not to say leasing activity has been poor in the retail market, as 2021 has seen a huge
improvement in total SF leased year-to-date when compared with 2020. Roughly 136,000 SF of retail space has been leased YTD through properties listed on the multiple listing service, as opposed to only 75,000 SF through the same period of 2020. The retail market is certainly improving, but we are not out of the woods in this space yet.
NOTE: All statistics in this article are derived from properties being actively marketed on the Fargo- Moorhead multiple listing service. Properties for lease or sale by owner are not represented in these figures.
Andy Westby is the president and managing broker for Goldmark Commercial Real Estate Inc. in Fargo, N.D.