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The year 2021 will be when commercial real estate in all its many forms begins to markedly recover from the COVID-19 pandemic. But this recovery will vary by segment and geography, and it all depends on the recovery from the pandemic itself.
Short term, the worsening pandemic may impinge on any recovery while we wait for vaccines to become widely available and be effective enough to allow businesses to open without restrictions and jobs to return or be created.
Government stimulus will play a big part in all this, too, as the survival of small businesses -- and many not-so-small ones -- increasingly appears to depend on whether they can get bailouts to carry them through to a recovery of their own.
Even those doing well have people working from home by the millions, and the impact of that on the office space business will greatly depend on what kind of new normal emerges as 2021 rolls on into 2022 and beyond.
Segmented CRE will attract new investment in multiple sectors
All these businesses and their rent flow are critical to CRE investors and property managers. That’s particularly true for retail and hospitality, both of which heavily depend on Americans’ ability to spend and travel.
While some mall real estate investment trusts (REITs) have gone bankrupt, other retail space operators are doing much better, especially those whose tenants lean heavily toward essential businesses like big-box retailers -- e.g., Home Depot (NYSE: HD), Walmart (NYSE: WMT), and Target (NYSE: TGT) -- as well as pharmacies, healthcare, and groceries.
Watch for increased investment in all those in 2021. One of those, warehousing, could present opportunities for deals for smaller investments. In fact, facilities that can handle last-mile logistics are growing in importance as e-commerce surges.
Time for an office visit…
And, for longer-term growth, consider well-run office REITs or, if you’re in the business yourself, watch for office space deals as multiple factors contribute to a potential resurgence there beginning in late 2021.
Two expert opinions on that come from recent outlook reports by CBRE (NYSE: CBRE) and MetLife Investment Management. The CBRE report says the second half of the year will be when this tale will unfold: “Only when workers can safely return to the office will the long-term effect of remote working levels become clear.”
But, the report says, don’t underestimate the power of teamwork, easy collaboration, and face-to-face business interaction to draw businesses back to the in-person model.
“Investment demand for office assets might surprise on the upside, not least because an expected period of dollar weakness will make U.S. assets very attractive to foreign investors,” the report says.
The MetLife report, meanwhile, says that, contrary to conventional wisdom, it expects central business district office submarkets to outperform their suburban counterparts, calling the swing toward the latter “short-term.”
And, that report says, “Some of the markets likely to experience the worst impacts in the near term (2021 and 2022) may also have the strongest demand over the next decade, potentially creating a unique buying opportunity in coming quarters.”
For example, Boston is a good market to consider because of its heavy concentration of life sciences and similar businesses that don’t lend themselves to remote work. And markets the MetLife researchers see as prime to recover from work-from-home hits now and see strong new demand later include San Francisco, Seattle, Denver, San Jose, and Washington, D.C.
But don’t take just my word for it…
Here’s how Gay Cororaton, a senior economist at the National Association of Realtors (NAR), sees the year ahead in CRE:
The second half of 2021 will likely be a better year than 2020…. While there will likely be some social distancing in place, I expect that in the second half, there will be a resurgence in many activities related to leisure, sports, and travel, and more people will return to the office. As cash flows and business activity improves, absorption of vacant offices, retail brick-and-mortars, and lodging will also tend to increase. Continuing job growth will enable more commercial and multifamily tenants to pay rent.
Specifically, Cororaton, who directs housing and CRE research at the NAR, says she expects vacancy rates to slightly decline to 13.5% in 2021 (from 14% in 2020); the retail vacancy rate to hover at around 7.5% (from 8% in 2020); the hotel vacancy rate to fall through 2021 and likely to average at 28%; and rental vacancy rate for apartments to hover at about the same rate, at 6%.
As for industrial space -- “the bright spot in the gloomy pandemic days’’ -- the NAR economist expects to see a continued decline in the vacancy rate to low 6%, after finishing 2020 at 6.7%, driven by e-commerce and data centers.
And as for geography, Cororaton says:
Secondary/ tertiary metro areas [will] do better than the top-tier cities like New York, Boston, San Francisco, the primary reason being affordability. This is based on the job growth prior to the pandemic and the migration trends in these areas, as people are moving out of expensive areas like the Bay Area and New York. Tech workers may also be able to work from home permanently, which will mean increased out-migration from the Bay Area. My bets for the geographic markets that will do well are Atlanta, Raleigh, Charlotte, Jacksonville, the D.C. metro area, Dallas, Phoenix, Boise, Colorado Springs, and Salt Lake City.
And a view from someone who puts the money down…
Camilo Miguel Jr. also shared some predictions. He’s the founder and CEO of Mast Capital, an investor and developer of residential and commercial properties in markets that include its home base of Coconut Grove, Florida, along with Miami Beach, Key West, and the Georgetown neighborhood in Washington, D.C.
He sees the same effects of the pandemic as other stakeholders: industrial doing well while enclosed malls, urban high-rise offices, and big-box group hotels taking major hits.
As for geography, Miguel expects high-tax states and markets -- “with the most notable example being Manhattan” -- to continue to struggle, while recent migration patterns lead him to conclude this: “Florida will continue to fare well and be a leader in economic recovery, and looking at the state at a more micro level, Southeast Florida will see the majority of the benefit.”
Miguel also likes the prospects for other markets that he says offer higher quality of life and tax benefits, citing Texas, the Carolinas, Phoenix, and Denver.
The Millionacres bottom line
No man is an island, nor is any single segment of the CRE business. While each market and industry will recover and grow in its own way, they won’t do it alone, nor without COVID-19 loosening its death grip on America.
“Spring and summer will see rebirth and renewal of real estate as a vaccine is widely deployed and further government stimulus drives the economy forward,” the CBRE report concludes.
Let’s hope that’s so.
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