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Commercial Real Estate: What to Expect as Year Progresses

By: Kelly Leighton on in

“Commercial real estate has been challenged,” said Dr. Lawrence Yun, National Association of Realtors’® chief economist, in a recent webinar.

However, things are looking up for the industry. Yun said the second half of 2021 looks “much better” thanks to the distribution of the COVID-19 vaccines.

Even though 2020 brought forth tremendous job loss, the average American has more personal income right now, Yun said. Bank deposits are rising, said Yun, noting that personal income was up 4.3% in the fourth quarter of 2020. With less to do, such as dining and shopping, Yun said people are saving more.

“Once we reach herd immunity, we may get back to normalcy and all this savings could be unleashed back into the economy,” said Yun. “This unleashing has very positive potential for the economy.”

Additionally, Yun expects apartment vacancy rates to drop, as people get tired of “being cooped up with other people.”

“Before the pandemic, the apartment sector had a low vacancy rate,” he said. Mortgage applications, which had been running consistently higher, have started to drop, he said, as have weekly pending contracts, as well as new listings. Mortgage rates will begin to rise again, Yun predicted.

Dr. Calvin Schnure, senior vice president of research and economic analysis at Nareit, said that while the recovery is incomplete, the market is showing signs of recovery, especially in data centers, cell towers and self storage.

For the remainder of 2021, Schnure predicts multifamily, office retail, industrial and senior housing will see a positive rebound. Currently, office space is struggling in larger cities, while falling flat elsewhere.

“Working from home is having a real impact on where people are choosing to live if they don’t have to commute. It could affect the office market long-term,” said Schnure.

With four times more workers working from home, there is a decline in office occupancy and a rising vacancy rate, said NAR’s Senior Economist and Director of Housing & Commercial Research Gay Cororaton.

“More landlords are offering short-term leases and rent concessions for offices,” she said. “But prices are not collapsing like in the Great Recession because there are not a lot of distressed sales.” Cororaton also noted there is a rising share of suburban offices.

Brandon Hardin, research economist at NAR, said there are winners and losers in retail from the pandemic. Retail jobs are down more than 360,000 jobs from February 2020, most notably in clothing and clothing accessories stores, as well as hobby stores, like books, sporting goods, music and retail motor vehicle and parts dealers. However, building material and garden supply stores, general merchandise stores and food and beverage stores have seen an uptick in employee numbers.

E-commerce saw a huge boost from the pandemic, jumping up 32.4% from 2019, with sales exceeding more than $791 billion, Hardin said.

“Retail traffic growth depends on how safe consumers feel when they are going into stores,” said Hardin. “The rate of vaccinations is critical to retail.”

Hardin said online retailers will continue to capture new customers, while retaining old ones. With e-commerce’s growth, it is no surprise that there was an increase of jobs in warehousing and storage jobs, up more than 72,000 jobs from February 2020. While demand for industrial and storage properties will remain strong, Hardin said that supply will continue to outpace demand.

Remote Work, Technology Top List of Commercial Real Estate Concerns

“Remote working and mobility is something that is quite concerning to the real estate industry as to what behaviors, and to what extent, remote working will stick, and time will tell,” said Michel Couillard, the Counselors of Real Estate’s CRE 2021 global chair, told The Commercial Observer. “COVID really impacted human behavior in terms of where and how space will be used, and there will probably be a need for commercial properties to reposition in order to meet that changing demand.”

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Data center
Commercial Real Estate Expectations in 2021

“The industrial sector was the undisputed commercial real estate champ in 2020 and expect it to remain strong in 2021 together with medical office and data centers,” said Joel Kreider, president of the Philadelphia Chapter of Society of Industrial and Office Realtors®. “Investors will be chasing opportunities throughout those three sectors this year and look for a trend toward smaller warehouse deals with expanded parking ratios as e-commerce fuels the need for last mile logistics.”

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