Market rent growth will remain negative for two years, and dip by up to 300bp.

Posted: December 18, 2020

Asset & Portfolio Management meeting

December 8 and 9, 2020


Market rent growth will decline for all property types in the first year following the Covid-19 pandemic – and by up to 200bp for office, according to NAREIM’s Asset & Portfolio Management meeting last week.


During a deep dive conversation on valuations and marks post-Covid, members discussed the impact of the pandemic on yields and cash flow, as well as looking to rent growth for industrial, apartments, office and retail.


Rent growth highlights:

  • During the first year of recovery following the onset of the pandemic, no property type escaped negative rent growth, with industrial the best performing at less than -100bp, and retail the worst at almost -300bp.

  • In the second year, only industrial would start to enter positive market rent growth territory, with apartments and office experiencing slight declines, and retail projected to witness market rent growth of around -50bp.

  • In the third year of recovery, only retail would continue to see negative rent growth. The other property types would see rent growth but not above inflation. The average 10-year market rent growth for office is projected to be around 2.7%, the meeting heard.


NAREIM members are underwriting lower rent growth and higher credit losses as a result of the pandemic, with the market expected to start recovering in 18-24 months.


The NAREIM Asset & Portfolio Management meeting also discussed the outlook for office and retail during the meeting. Key highlights included:


  • Office is not dead, but the impact of working-from-home could change the market selection – and operating and capital expenditure of office assets in the longer-term.

  • An analysis of the markets most impacted by work-from-home, included those with high costs of living, high commute costs and the greatest share of occupations able to work from home. Among top 10 markets impacted were: Washington DC, San Francisco, Austin, Denver, Raliegh, Atlanta, San Jose, Phoenix, Sacramento and Seattle. New York came in 11th.

  • Impacts on office demand would be offset by an expected pop in hiring in the second half of 2021, the meeting heard.

  • Brick and mortar retail is still resilient, with 90% of all retail sales taking place through stores. But the focus needs to be split between necessity - with 50% of all shopping trips undertaken owing to the need to complete a task – and social, entertainment, discovery and aspiration

  • The retail of today should mix the shopping attributes of shoppers (highlighted above) with a focus across necessity, as well as urban cool retailers, local-authentic retailers, experiential, lifestyle and sustainability retailers. Smaller format retailers, housed in a walkable community environment, are also a key way of diversifying income across multiple uses.

  • Ancillary uses are being explored, such as ghost kitchens and fulfilment centers in dark spaces. Members agreed it was hard to make the economics work on ghost kitchens, given the significant cap ex required; and fulfilment centers were very select and targeted for infill spaces – for example, a dark space could be useful for a retailer’s own fulfilment needs but not Amazon. Flexible office, such as medical office, helping drive foot traffic was one model that has worked in member portfolios.


Download the meeting presentations here.