How will recovery look, and when will it happen?
It’s interesting to look back at the early predictions on how COVID-19 would impact the CRE industry. Many analysts, either hopeful or looking at something unprecedented, only offered confident short-term calculations. Long-term projections typically referred to a domino effect, but the answer to questions about “how deep and how long?” have been “We don’t really know.”
The nation, however, is now on the other side of the short-term impact—at least, the first one. In addition to a loss of life only seen during certain wars and previous pandemics, the virus has marched through the US economy, pillaging most sectors. With record unemployment, trillions of dollars in stimulus money, numerous lost businesses, and a recession, how will CRE rise out of the settling dust?
The state of the economy
As of this writing, the May unemployment rate provided a glimmer of light at the end of the COVID-19 tunnel. With states reopening for business, 2.5 million jobs were added in May, and many officials seized this opportunity to celebrate some good news. The highest gains were seen in the restaurant/bar/food service industries, with hospitality coming in second place, construction in third, and healthcare in fourth.
Economists, on the other hand, are urging everyone to proceed with caution. With estimates ranging from 13.3% to several points higher (depending on how the number is calculated), the unemployment figure doesn’t yet indicate economic recovery. Most new jobs were for part-time positions, an indication of the fragility of the American economy. And with 30 million Americans still out of work, the unemployment rate remains the highest since the late 1940s.
CRE recovery will be an uphill battle
Recovery, regardless if it’s V-shaped or U-shaped, will take some time, particularly for CRE. Nearly half of commercial rents were not paid in April and May. Many tenants—including national chains—have indicated they will not be able to pay rent for months to come. If large retailers are saying this, then the situation for smaller businesses is even worse.
This adds up to a chain reaction: landlords may be forced to file bankruptcy, CRE prices may drop, banks and private investors may hold back on funding for commercial projects, and local governments may see unpaid property taxes.
Many experts forecast the economy to stabilize in the third quarter and start to recover in the fourth, but CBRE projects CRE to fully bounce back 12 to 30 months later, depending on the sector:
- Office space is a bit of a mixed bag. Although leasing has slowed, vacancies are on the rise, and tenants and landlords are re-negotiating lease terms, a decrease in new office construction has helped slow falling rents.
- Hotels were one of the first sectors to fall under COVID-19 containment efforts. Along with retail and food and beverage services, hotels are expected to take the longest to bounce back, especially those located in cities with a strong tourism and convention industry.
- The retail sector, like hotels, was significantly impacted by quarantines and lockdowns. Many brick-and-mortar retailers felt the financial pinch as unemployed Americans focused their spending on essential items. Overall retail recovery hinges on Americans getting back to work, handling COVID-related debt, and having enough disposable income to begin shopping again.
- Industrial properties are expected to bounce back the quickest, in large part due to the rapid growth of e-commerce and the need for localized logistics locations.
Some good news on the CRE front
Despite the caution on unemployment numbers and the prediction of a slower CRE recovery, investors interested in playing the long game that is commercial real estate investment are in a very interesting position. Incredibly low interest rates and discounted property prices give investors an opportunity to expand real estate holdings. Particularly attractive are properties owned by smaller landlords who are less equipped to deal with a COVID-19-controlled economy.
Similarly, foreign investors, especially those from Latin America, are looking to the long-term strength of the US market as a means of surviving the pandemic’s economic fallout in their own countries. With an eye toward shopping centers and mixed-use properties, Latin American investors—some more accustomed to economic uncertainty at home—see promise and stability in US income-producing assets.
Hope in South Florida
Each day, especially as cities and counties have reopened, we have all heard the phrase “new normal.” And while there are some confident predictions to make, how that situation will look remains fluid. With any economic and CRE recovery discussion, it’s important to remember that other issues can quickly have an impact: consumer anxiety, civil unrest, and a second wave of the pandemic, to name just a few.
Morris Southeast Group is keeping a close eye on all of these factors, and we will continue to revise our outlook and provide information as events unfold. If you have questions, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
Tags: commercial rents, COVID-19, real estate, unemployment rate
