Commercial real estate (CRE) endured a volatile year in 2020. Market conditions started strong but took a big hit when the COVID-19 pandemic blindsided the global economy. While many markets began recovering toward the end of the year, 2020 was a down year for commercial real estate.

Here's a closer look at some of the key statistics and data for commercial real estate in 2021 to help investors see what's changed and what the future may hold.

Commercial real estate statistics on the impact of COVID-19

The COVID-19 pandemic had a significant effect on the commercial real estate market in 2020. The data bears this out.

For example, respondents to the National Association of Realtors' "Commercial Real Estate Trends & Outlook January 2021 Quarterly Market Survey" reported a meaningful amount of change in the fourth-quarter survey compared to the one taken in Q3 2020.

Here's a look at some of the more significant findings reported by survey respondents in Q4 of 2020 compared to what they saw in the pre-pandemic first quarter:

  • 59% reported an increase in tenants with missed, late, or partial office, retail, or industrial rent payments, up 5% from Q3.
  • 63% reported an increase in missed/late/partial rental payments for multifamily residential space, up 10% from Q3.
  • 65% reported an increase in tenants who received rent concessions, unchanged from Q3.
  • 46% reported an increase in leasing transactions in suburban areas versus the central business district, up 3% from Q3.
  • 48% reported an increase in demand for flexible/co-working office space from individuals such as gig workers, down 3% from Q3.
  • 39% reported an increase in demand for flexible/co-working office space from enterprise clients and firms, down 4% from Q3.
  • 69% reported an increase in companies leasing or moving into offices with smaller square footage due to working from home, up 7% from Q3.
  • 63% reported an increase in short-term office leases, up 4% from Q3.
  • 53% reported an increase in the repurposing of vacant malls, up 1% from Q3.

As that data shows, the COVID-19 outbreak had a widespread impact on the commercial real estate sector. More than half of the respondents experienced an increase in missed, late, or partial rent payments because tenants couldn't afford to pay rent due to government-related shutdowns or weak economies. That had a noticeable impact on landlord cash flows, with the retail sector among the hardest hit due in part to a string of bankruptcies.

Meanwhile, the pandemic dramatically impacted the office sector. Many companies and individuals struggled with remote work, which drove an uptick in demand for flexible and co-working space, especially in suburban areas. Conversely, given the uncertainty of when companies could fully return to the office, they cut their spacing needs, opting for short-term leases.

Changes in commercial real estate pricing

Despite the effect the pandemic had on the commercial real estate market, pricing continued to grow. According to the "May 2021 RCA CPPI: U.S." summary report, U.S. commercial real estate prices rose at a 1.3% annual rate from April 2020 to 2021.

Driving that increase were apartments (up 7.6% year over year) and industrial properties (up 9.4%), the retail sector (up 1.3%), and office buildings (up 3%).

The most significant callout here is that industrial, apartment, retail, and office indices all posted positive annual returns for the first time since the pandemic began.

Commercial real estate dollar volume in 2021

Overall, the dollar volume for commercial real estate in the U.S. was 18% lower year over year in the first quarter of 2021 compared to the third quarter of 2020, where the volume was 57% lower year over year than in 2019. In addition, office sales were off 60%, while apartment transactions declined 51% compared to the same period as buyers and sellers chose to wait for a bit more clarity before transacting.

While fewer office properties changed hands in the third quarter due to the uncertain outlook caused by the pandemic, the fourth quarter got off to a great start. For example, leading New York City office REIT SL Green Realty (NYSE:SLG) agreed to sell 410 Tenth Avenue in early November for $952.5 million, representing a substantial profit for the company and marking the largest commercial property sale in the U.S. since March.

Meanwhile, thanks to widely available credit, only 1% of the overall commercial real estate dollar volume during the third quarter were sales of properties out of distressed situations. However, there were two notable areas of distress: retail (3% of deal volume) and hotels (9%). That's due to the outsized impact the pandemic had on those two property sectors.

Commercial real estate revenue in 2021

According to IBIS World, the pandemic significantly impacted commercial real estate industry revenue in 2020 with an estimated drop of 17.8% to $893.2 billion as corporate profit and the value of private nonresidential construction activity declined significantly. That's the sector's second down year in a row and would put it 18.8% below its peak of $1.1 trillion in 2018. Further, 2020's significant drop puts the commercial real estate market's size below where it was in 2015.

Demand for commercial real estate in 2021

One of the most significant factors for commercial real estate demand is that a robust economic recovery has now become the question of "when" rather than "if." It's undeniable that rapid growth for the remainder of this year and next will generate pre-pandemic-level demand for various CRE types.

However, offices still face long- and short-term issues with the permanent pivot to work from home spurred by the pandemic, though more workplaces reopening later in the year could lead to the possibility of office occupancy and rents beginning to stabilize. Long-term, the demand for office space is still uncertain since no prior office market downturn has seen such a dramatic shift.

Meanwhile, one of the few bright spots in the commercial real estate sector was industrial property demand. That's due to the continued growth of e-commerce and the need for more storage space for inventory because of the pandemic. However, the demand for industrial space still outstripped supply, as net absorption was 40.2 million square feet, which fell short of new supply by 25.4 million square feet because of the amount of space built on speculation. However, with warehouse space demand expected to grow by 1 billion square feet by 2025, this market could tighten considerably.

Vacancy rates for commercial real estate in 2021

The continuing uncertainty has contributed to vacancy rates forecasted to rise to 19.2% in 2021, which would exceed the previous 2010 high of 17.6%. According to Moody's Analytics, these vacancy rates will then hold steady in 2022, leading many to believe that the office sector will suffer more than any other in 2021. Industrial real estate will benefit the most from the tailwinds of a sturdy economic forecast and the acceleration in e-commerce.

Rent growth for commercial real estate in 2021

Apartment rents have taken a positive turn following their 3% decline in 2020, with national average effective rents expected to rise by 2.1% in 2021 and a return to pre-pandemic levels forecast by 2022. Dense urban areas like the Bay Area and New York and their multifamily markets were rocked hard by the pandemic, but the low point has been reached and recovery is on the horizon.

Due to strong demand, the industrial sector has shown more than a glimmer of hope in recovery with an expected rent rise of 3% in 2021.

"The need to warehouse inventory and match consumers' expectations for expedient shipping will provide more than enough absorption to push rents higher and vacancies lower," said Thomas LaSalvia, Senior CRE Economist at Moody's Analytics.

Retail rents are expected to fall another 6.8% in 2021 as brick-and-mortar retailers struggle with e-commerce competition.

The bottom line

The COVID-19 outbreak was a significant factor affecting the commercial real estate industry in 2020. However, this insight offers a glimpse into the much-needed rebound in CRE. A year ago, we were on the precipice of the unknown. Now, with a clearer picture of the ongoing economic challenges and plausible solutions, the problems the pandemic brought are edging closer to the rearview mirror.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.