U.S. | Commercial Real Estate After Covid – Crisis And Reinvention, Business As Usual, Or Full Steam Ahead?
Filip Blazeshki (BBVA Research) | The rapid economic recovery over the next few years will greatly benefit commercial real estate, but structural challenges for some of its segments will persist and may worsen
- Strong economic growth over the next few years will reduce vacancies and support rental growth
- Offices and retail will remain challenged in the long term and the new build will remain very low
- The housing segment will benefit from the housing shortage
- The industrial CRE will benefit from structural changes in the economy
The US is slowly exiting the recession caused by Covid and is well on its way to seeing the highest growth rate in nearly 40 years. Economic expansion is being driven by effective vaccinations, reopening of the economy, strong job creation, increased savings, pent-up demand, massive financial support, and accommodative financial conditions. The commercial real estate (CRE) industry will benefit greatly from these conditions, which will help reduce vacancies and support rental growth.
However, the structural challenges the industry faced before the pandemic, caused by changes that new technologies bring and are changing the way we live, work and shop, have only intensified. CRE is a large segment of the economy and it will not be costly to adapt, but it will be a long-term process and some segments will do better than others. Despite a boom from strong economic growth over the next few years, offices and retail CRE will continue to face challenges that may trigger an existential crisis and go through an adjustment process with very few new builds, only in strategic locations and conversions. The residential segment is likely to approach pre-recession conditions soon, albeit with some adjustments due to changed tenant preferences. The industrial CRE, on the other hand, will benefit greatly from the rapid growth in the coming period and the structural change in the economy.
CRE – a large part of economic wealth
Non-financial corporations and nonprofits own nearly $ 32 billion in real estate assets (Figure 1), representing nearly 39% of all assets in these sectors of the economy. Some of these properties may not necessarily be CRE in the traditional sense of the term1. Nareit estimated the value of apartment buildings, offices, retail, healthcare, hospitality, industrial, flex, and self-storage CRE to be around $ 16 billion in 2018, equivalent to $ 17.5 billion in 20202. This still makes up a significant part of the economy: over a fifth of the total assets of all non-financial corporations and non-profit organizations, and 83% of GDP. However, real estate’s share of total corporate sector wealth has declined over the long term (Figure 2), and the Covid pandemic accelerated the structural forces that weighed on it, mainly through wider adoption of teleworking, which is challenging the office market and the E. -Commerce, which adversely affects the retail CRE. The long-term decline reflects lower real estate investments as new business models gained momentum over time, offering new channels for the delivery of products and services, as well as attractive investment returns.