Prior to the pandemic, prices in U.S. commercial real estate (CRE) had been on a steady rise since the Great Recession. With a backdrop of dovish Fed policy and a low interest rate environment, CRE was an attractive asset class for yield hungry investors. In fact, overall pricing in most CRE segments had doubled since 2008.

The chart illustrates, however, that while there has been a material appreciation in real estate pricing, rents have not kept up at the same pace. Rents, when adjusted for inflation, have actually fallen in most categories since 2008. You will see that only apartment rents have increased over the last decade.

Like many areas, the pandemic will have long-lasting effects on CRE as online shopping has accelerated and many businesses evaluate work from home options. With these fundamental downturns, we anticipate some forced transition from the legacy, yield-oriented CRE owners to distressed-asset investors that may present attractive, long-term opportunities.

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