Pandemic Effects May Weigh on Commercial Real Estate Recovery | Arkansas Business News
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LOS ANGELES (AP) – The proliferation of COVID-19 vaccines is fueling optimism that pre-pandemic Americans will increasingly return to the methods by which they used to shop, travel and work.
This would be a welcome change for companies that own office buildings and hotels, or that rent space to restaurants, bars, department stores, and other retailers. These were the hardest hit areas of commercial property over the past year as the pandemic forced many businesses to close temporarily or operate on a limited scale.
But even if the U.S. economy appears to be coming back to life this year, as many economists are now predicting, it could take longer for commercial real estate demand trends to recover as companies reassess their needs after the pandemic.
That means higher vacancy rates and falling rents this year, especially for retail and office property owners, said Thomas LaSalvia, senior economist at Moody’s Analytics.
“We see such potential and lots of anecdotes and early data about real changes in the way we work and how we buy,” he said. “The structural changes that are currently taking place still make us pause to say that we have recovered in terms of office or retail.”
So far this year, the commercial real estate market has seen some positive trends as many businesses that have had to close or have limited operations are given the green light to be opened by governments after new coronavirus cases fell and a ramp came up is -To introduce vaccines.
In March, the national unemployment rate fell from 6.2% to 6% and employers created 916,000 jobs, most since August. These included 216,000 jobs in restaurants, hotels and bars – the sector hardest hit by the pandemic.
And this week the International Monetary Fund predicts the US economy will grow 6.4% this year. That would be the fastest annual pace since 1984 and the strongest among the richest countries in the world.
Commercial property owners, however, face uncertainty as tenants reassess their needs. Will companies that have rented office space and spent the past year with most or all of the home-based employees need just as much space? Will retailers who have relocated more of their online activities during the pandemic limit their stores? Will companies resume their travel expenses after opting for video conferencing?
The full impact of these ratings may not be known for a while, as commercial property leases typically run between five and 15 years. However, part of the economic consequences of the pandemic is already visible in the data from the national commercial real estate industry.
According to Moody’s Analytics, the vacancy rate for retail space rose in the first three months of this year from 10.2% in the previous year to 10.6%. And the average effective rent left after concessions offered by landlords to attract tenants were down 1.5%.
Moody’s Analytics predicts retail property vacancy rates will rise to 11% or 12% as companies reconsider their space needs after last year when the percentage of online retail purchases nearly doubled to 20%.
“We expect this to get closer to 25% by 2025,” said LaSalvia. “This pandemic has forced many people to peel the association off in order to be ready and able to shop online.”
For office space, vacancies rose from 17% to 18.2% in the first quarter, while the average effective rent fell by 1.8%, according to Moody’s Analytics.
Before the pandemic, domestic office space had increased by 15% to 16%. LaSalvia expects this to rise to 20% by 2022 and gradually decrease to 17% by the end of the decade.
Hotels have had a particularly difficult time. The occupancy rate fell a year ago after global leisure and business travel almost came to a standstill. The monthly occupancy rate was well over 60% in 2019 and was 65.7% in February 2020. Two months later, it dropped to 20.6%, according to Moody’s Analytics.
The occupancy rate improved to around 45% last summer before subsiding again. In January it was 34.4% after 66% in the previous year.
Average Revenue Per Available Room (RevPAR), a key metric for the hospitality industry, was $ 30.27 in January, a 64% year-over-year decrease.
Hotel occupancy is expected to increase this summer as more people get a COVID-19 vaccine and become more comfortable while traveling. Last month, US airport security checkpoints saw a sharp increase in traffic, including more than 1.5 million people in a single day. This is the largest number since the pandemic began.
“Summer leisure is going to be pretty good,” said LaSalvia. “But the business trip will hold us back a little this year, and it may be a few years before things really pick up again.”
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