The U.S. economy experienced one of the swiftest declines in history last year, followed by a quick and relatively significant recovery in the second quarter of 2020. Speakers at the National Association of REALTORS® (NAR) Commercial Economic Issues and Trends Forum, held as part of the 2021 REALTORS® Legislative Meetings & Trade Expo, recently discussed these historic shifts in the nation’s economy over the past 12 months while projecting a favorable outlook for the commercial real estate market in the coming year.
Lawrence Yun, chief economist at NAR, predicted that considerable capital will be pumped into the economy in 2021’s second quarter, with consumers eager to tap into a year’s worth of savings and unspent stimulus funds.
“Economic expansion and the jobs recovery will lead to rises in occupancy across all commercial real estate property types,” Yun said. “However, overall consumer price inflation is expected to increase 3% by the end of 2021 and likely will stay stubbornly high through next year, which will increase interest rates to 3.5%.”
Hotels, restaurants, theaters and other entities across the entertainment and hospitality industries are expected to benefit from this pent-up demand as many cites have already eased or altogether ended pandemic-induced restrictions.
While housing helped prop up the economy over the last year, apartments and rental markets have stumbled in the midst of the pandemic. Yun, however, expects them to regain footing as the broader national economy—particularly in urban areas—continues to recover.
“The apartment sector underwent sudden swings in occupancy—down abruptly in the early months of the pandemic and then sharply rebounding in recent months—but we expect vacancy to drop and rents to rise,” Yun said.
Office rents have also declined over the past four quarters, and it is unclear if new leasing of office spaces will take place, even as more workers return to their offices. Office vacancies are forecasted to remain elevated at 16.5% in 2022, while retail vacancies are projected to settle at 11.5%, according to NAR.
“The industrial sector has been the star throughout the pandemic,” Yun said. “There’s been great demand for industrial space, and reconversion of some disused properties like older shopping malls can help meet this demand.”
On the whole, the pandemic is leading to sweeping changes in the commercial real estate sector, including modifications to vacant hotels/motels. NAR recently released “Case Studies on the Conversion of Hotels/Motels into Multifamily Housing,” a report that demonstrates the feasibility of such conversions. Often, these adaptations require public funding, such as the Low-Income Housing Tax Credit, the Historic Tax Credit or tax abatement.
John D. Worth, executive vice president for Research and Investor Outreach at Nareit, spoke at the forum and provided a positive forecast for the future of commercial real estate.
“Work from home is the most important question facing the future of commercial real estate coming out of COVID-19,” he said.
Worth noted that commercial valuations are recovering, but that those improvements are occurring unevenly across various property types, with high returns over the COVID-19 period in REIT funds invested in digital real estate such as cell towers, data centers and logistics facilities, as well as single-family homes, self-storage and timber. He explained that share prices are being driven by the strong demand for housing, the surge in e-commerce and the rising price of lumber.
“We’re going to go through a period where companies will experiment with how they use office space, but I’m bullish about the outcome of the office space sector after a period of experimentation,” Worth said.
Both Yun and Worth agree that office vacancy rates will remain elevated compared to pre-pandemic levels as hybrid work models become the norm in America.
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