What Commercial Real Estate Looks Like a Year Into the Pandemic – Commercial Observer
The light at the end of the tunnel could be in sight for the US economy.
As Jamie Dimon, Chairman and CEO of JPMorgan Chase, detailed in his latest letter to shareholders, the economy could be heading for a boom that could last until 2023.
“Strong economic growth, some signs that the pandemic is getting under control, and continued supportive government policies suggest broad positive trends,” said Victor Calanog, head of commercial real estate economics at Moody’s Analytics REIS. “Current data and forecasts indicate a fraction of the severity level originally expected, even in the worst-hit sectors like hotels and retail.”
Keep an eye on these trends and opportunities as we move forward in 2021.
Watch macro consumer trends
Failure security for rental payments: Multi-family rent payments fell slightly during the pandemic, which could have been greater without rental assistance programs and a national eviction moratorium. The outlook today is optimistic. “Moody’s expects vacancies to remain below 5.5% in 2021, with rental growth developing positively,” said Calanog.
Multi-family moves: At the start of the pandemic, many city dwellers moved to nearby submarkets or out of state suburbs that offered more space per dollar. “Think Long Island and Suffolk Counties for Manhattan residents or all the way to Texas or Florida for people looking for more space and less strict lockdown rules,” Calanog said. “Places like Yakima, Wash .; Lakeland, Fla .; Grand Junction, Colo .; and Myrtle Beach, SC, all had 2020 household growth rates that exceeded their 10-year average growth numbers by a factor of two or more. “With the cities reopening, these tenants appear to be returning to key markets.
Bridging the distance: With increasing e-commerce spending and the demand for fast shipping, so is the need for warehouse space. This is not only benefiting massive warehouses in areas like King of Prussia, Pennsylvania. Smaller warehouses in suburbs and urban areas are also needed for last mile fulfillment facilities.
Conversion to hybrid offices: It is unclear what a return to the office will look like exactly. The pandemic has shown that some employees can work 100 percent successfully remotely. However, other employees cannot do this or prefer to work on site from time to time. It can also be difficult, if not impossible, to virtually replicate the collaborative energy of on-site teams. With so many factors, workplaces are likely to use a hybrid model, which can vary from office to office.
The ABC of retail: Retailers were largely closed at the start of the pandemic. When small local businesses like convenience stores, nail salons and sandwich specialties – the places that give the neighborhoods their character – were able to reopen their doors, customers were eager to return. B and C malls, which were in decline before the pandemic, didn’t do as well.
Affordable living creativity: The past year has made the urgency of the real estate crisis clearer than ever. In order to increase the affordable housing supply, the industry has to get creative. How can we build affordable houses quickly and cheaply? Part of the solution is the adaptive reuse of buildings in the public (e.g. closed military facilities and schools) and private sectors (e.g. hotels and offices). In addition, some cities have a large supply of orphan lands, but their unique shapes and sizes can make development difficult. In this case, a modular structure can be useful, which can reduce the construction time and the associated costs. Maintaining existing affordable housing is also crucial.
The economy is picking up and doing better than expected, creating commercial real estate opportunities for certain types of property. Investors should consider the following:
- Portfolio expansion: It can be an advantageous time to buy homes, especially when you look at the competitive landscape in the housing market. Class A retail space can also be worth the investment.
- Build-to-Suit projects (BTS): It is unclear what the workplace will look like in the coming months. However, some companies have a clear view of their post-pandemic offices. The developers of BTS projects can make this vision a reality.
- Real estate refinancing: The rest of 2021 could be an ideal time to refinance. Regardless of the asset class, real estate investors can take advantage of the current climate and secure historically low interest rates.
Finish strong in 2021
With interest rates close to zero, falling unemployment rates, rising vaccinations, and the potential for infrastructure investments, the country could produce its highest gross domestic product (GDP) since World War II. Although this economic potential depends on many virus-related factors, opportunities lie ahead for commercial real estate investors.
Al Brooks is Head of Commercial Real Estate, Commercial Banking at JPMorgan Chase.