Why I See Recovery Signs in Commercial Real Estate | Arthur Nachman

Why I See Recovery Signs in Commercial Real Estate

Why I See Recovery Signs in Commercial Real Estate

Governments, news outlets, and businesses are (mostly) all unified in their assertion that 2021 will be a year of restoration and recovery in the face of the disastrous, Covid-afflicted year of 2020.

The signs are all there: vaccines are rolling out, the prospect of herd immunity becomes more realistic, shops and restaurants re-open their doors, and mandatory quarantines are ending.

But are those signs of recovery also present for the field of commercial real estate, one which has been massively impacted by the pandemic as people socially distance and work from home?

Fortunately, I think it’s safe to say that CRE will begin to see a gradual rebound throughout 2021.

However, it’s also safe to say that that recovery will be uneven – cities significantly affected by Covid-19 like New York will be slower to make a comeback than cities that weren’t or suburban areas.

The rate of recovery will also depend on the vertical. Hospitality, for instance, will see a slower recovery than industrial. We’ll get into the specifics of that below.

In this post at large, though, we’re going to take a look at some evidence that commercial real-estate will start to recover this year.

We’ll also look at the metrics you should pay attention to that demonstrate recovery and some opportunities related to that recovery that you can take advantage of over the coming year.

Let’s dive in.

The Return of CRE

First, let’s look at some projections.        

Most visitors to this page will know that Cushman & Wakefield is one of the world’s largest commercial real estate firms.

In the face of CRE anxiety, they published a large study in January giving out some indicators that CRE will recover.

First, global GDP is projected to grow over the year, especially in the second half of the year.

They also mention data indicating many office workers are not happy working at home – 36 % felt that they were not learning anything new – to suggest that even office spaces will rebound (something that investors are anxious about given the “work-at-home” trend).

Furthermore, consumers have been saving money during the pandemic as they’re not going out as much. The savings rate was 12.9 % according to Cushman & Wakefield, which is much higher than average.

We can assume they’ll want to spend this money in ways they couldn’t in 2020, including through a return to intra- and international travel. Cushman & Wakefield
Before this study, back in October 2020, the nonprofit real estate research organization known as the Urban Land Institute conducted a survey looking at commercial real estate in the wake of the pandemic

They projected that return to office spaces will increase moderately in 2021 (0.3 %), finally reaching pre-Covid levels in 2022 (4.3 %, up from the 2 % decrease in 2020).

They also projected that annual returns for the industrial vertical would be 6.2 % in 2020 and 10 % in 2021.

Key Metrics to Watch    

As 2021 goes on, we’ll see an increase in the amount of people working at an office, though I do expect remote work to stick around at least until the end of 2021 (it could be a permanent change to some degree).

Look out for bus and subway travel increases as individuals become more confident that they won’t become ill.

You’ll also see increasing investor confidence in taking on projects, for example new construction projects.

Specific to CRE, also watch for movement among REIT investors.

Using the Commercial Real-Estate Rebound to Your Advantage

By now, I hope you’re convinced that CRE will make a recovery. Forget all the doom-and-gloom – in my opinion it’s just common sense that CRE will rebound, and projections from highly-reputable firms seems to bear this out.

Yes, I can’t say for sure that things will look as they did pre-Covid come January 2022, but I can say they’re going to look much better by that time.

Let’s look at some trends you can work with to increase your commercial real estate ROI in 2021 and beyond.

Vacancies

The pandemic has caused plenty of commercial real estate vacancies – by the end of 2020, office vacancies had reached an unprecedented 17.1 %.

All this means costs have been driven down. In other words, it’s a great time to invest, buy up space, and prepare for the recovery that’ll come over the next 2-3 years.

Again, see my other post here about how offices will look different in the post-Covid world, and take advantage of these (namely, smaller spaces, barriers, are increased space between work stations with specialized conference and training rooms).

The Industrial CRE Boom

It’s no secret that E-commerce retailers like Amazon have done incredibly well throughout the pandemic.

Brick-and-mortar retail stores, on the other hand, have not. This comes as a result not only of the obvious – the intermittent quarantines and stay-at-home orders – but also because of disruption to supply chains.

Many businesses have operated with a “just-in-time inventory model,” acquiring products as they need them. There was no need to spend money on storage – at least, not in a pre-Covid-19 world.

The pandemic has changed this philosophy, as businesses opt to have products on-hand in further outbreaks.

This means that CRE leases in the form of warehouse contracts are set to increase.

It’ll also affect manufacturing, as people desire more locally-made products that won’t be affected by problems with international supply lines.

“Pent-Up Consumer Demand”

As mentioned, people have had lower expenses throughout 2020 simply because they haven’t been able to go to restaurants or stores.

It’s not unlikely that we’ll see a huge increase in spending as the Covid-19 situation begins to improve. One area that will be affected by this is travel.

For obvious reasons, the travel sector has been hit especially hard by the pandemic.

However, many people’ve been bitten by the “travel bug” who have been anxiously waiting for the day borders will open again. They can get on planes and visit tourist destinations without contracting coronavirus.

One survey conducted by Deloitte showed that, in February, 31 % of adults in the U.S. would be okay with flying, while 41 % would stay in a hotel.

The important thing here is that of adults who were vaccinated, 54 % would feel safe on an airplane and 70 % would stay in a hotel.

Conclusion

This last survey is a good point to conclude on, as it pretty much sums up how recovery will go:

The rebound of CRE will be tied directly to vaccination rates and so how safe people feel.

As vaccines continue to roll out, the survey shows that the hospitality vertical will make a comeback.

I feel it’s safe to tie this to other verticals – office, multifamily, retail, mixed use, land, special purpose, and (especially) industrial – too.

This whole contraction was due to Covid-19, and so as that threat shrinks, things will get back to normal, even if it’s a somewhat altered normal.