FARGO, N.D. -- From my “pre-COVID” experience in the world of commercial real estate (CRE), the span of a typical four-month period was not a long enough window to see wide swings in a given market. Sitting here today, I would say a lot can change in four months during a global pandemic, apparently.
I last wrote about the state of the CRE market in the Fargo-Moorhead Metro in early March,* just days before we saw mass forced closings and stay-at-home orders affecting nearly every person and business in America. Yes, North Dakota has fared better than most and our economy has not taken the same hit that major cities across the US have. However, that does not mean our market has been immune from change.
Just over four months into this pandemic, now is a good time to examine what has happened so far and where we may be going from here in the major segments of our local CRE market.
In early March, I commented about the “oversupply” office leasing market we were in. Since then, the situation really has not gotten better, but it also does not seem to have gotten much worse either. There is leasing activity across the market, but not at a pace where we see inventory going down significantly. The market appears to be in neutral, with almost the same amount of office space for lease today as there was in early March at our “pre-COVID” stage. While more than 150k SF of office space has been leased since then, much of that was to one large user and new space continues to come online offsetting those reductions in inventory.
I do not anticipate a big cliff for the office market like we are seeing on the retail side, as most office users have been able to keep their doors open for business while employees have been working from home. Demand for rent abatements or forgiveness during shutdowns in the office market has been very low as well, which is a good sign that many traditional office users are not necessarily struggling to pay their bills.
I see change coming in a more staggered pattern as office leases expire over the next one to five years. Some businesses are learning they can get by with more people working from home, which will lead to space contraction and downward pressure on demand. However, I also see many businesses bringing employees back to the office with more social distancing in mind.
That trend will lead to more SF per employee in the office, which should help offset to some degree the trend of more people working from home. Net-net, I expect the result to be less office space leased per company over time, but again we will not see a steep drop-off in my opinion. I also expect the market for the sale of office buildings to remain strong for sellers because of historically low interest rates continuing for the foreseeable future and businesses looking to get out of leasing situations.
In early March, we were seeing a positive trend of industrial space coming off the market at a pretty decent clip. I am pleased to see that trend line has continued through the past four months. More than 200k of industrial space was leased up in our market since early March, a positive sign of continued strength in this market despite the economic doom and gloom we commonly hear about.
In terms of where our local industrial market is headed, I think we will continue to see strong demand and leasing activity overall. Nationally there is an emerging trend where vacant retail or big box spaces are being converted to industrial warehousing to create better “last mile” delivery solutions. With online shopping booming during the pandemic, online sellers are focusing more and more on improving service by getting goods closer to their consumers. I am not seeing those retail to warehouse conversions gain traction yet locally, but with the growing inventory of retail/big box space in our market, I wouldn’t be shocked if we get to that point in 2020 or 2021 potentially.
The old saying “When it rains, it pours” could not be a more accurate portrayal for our friends in the retail market unfortunately. What was already a tough market locally for owners of retail properties has only gotten worse since early March. Forced business closures and changing consumer behaviors have wreaked havoc nationwide, and locally the impacts have been felt as well.
Since early March, retail inventory for lease has increased 16% to almost 1M SF. That is many YEARS of inventory at our current lease-up rate, and I do not see that picture improving anytime soon. The question is just how much retail demand will we actually see in the near-to-mid term with the uncertainty of our market right now. I believe it will be a Tenant’s market for some time.
Any Westby is President and Managing Broker for Goldmark Commercial Real Estate Inc in Fargo, N.D.
*The article, “Forecasting the commercial real estate market in the Fargo-Moorhead metro,” was already submitted and set to publish in the April issue when the pandemic was declared.