Pent-up demand, consumer savings and widespread vaccinations will spark broad commercial expansion this year, according to economists attending NAR’s Wed. webinar.

CHICAGO – As vaccination rates rise nationwide, commercial real estate is likely to post gains across all sectors, fueled by pent-up demand and a high level of consumer savings, said leading economists on Wednesday during the National Association of Realtors® ‘(NAR) virtual “Real Estate Forecast Summit: Commercial Update” webinar.

The U.S. economy will continue to improve in 2021, said NAR Chief Economist Lawrence Yun, and that improvement is likely to drive gains across most commercial real estate markets.

Despite job losses and lower GDP in 2020, Yun said personal income was actually up by 10.7% in the second quarter of 2020 and 4.3% in the fourth quarter thanks to federal stimulus measures, including direct payments and unemployment compensation. The higher income combined with reduced activity during the pandemic resulted in an elevated savings rate, which could result in a strong economic resurgence once the COVID-19 vaccine distribution becomes widespread.

“Once we reach herd immunity, all these savings could be unleashed,” said Yun. “It could be as soon as the second half of this year.”

The multifamily sector could also benefit from increased spending later in the year as renters return to the market, Yun said. The shortage of affordable housing and the pandemic-related trend of additional family members joining households may act as further spurs.

“Jobs are being created, and people may be tired of being cooped up with family,” he said. “Some may rent simply because they’re being choked out of the home-buying market by rising prices.”

Yun predicted GDP growth of 4% and job gains of 3 million for 2021.

Calvin Schnure, the National Association of Real Estate Investment Trusts’ (NAREIT) senior vice president of research and economic analysis, said that the trajectory of commercial real estate recovery in 2021 will be different from previous recoveries after economic downturns – specifically he expects a much faster recovery.

“The way we got here matters,” Schnure said, noting that it’s not like the Great Recession. In the latest downturn, the economy and commercial real estate slowed due to an external shock rather than internal weaknesses, such as overheated or over-leveraged markets. Beyond the pandemic’s impact, “CRE fundamentals were pretty good in 2020,” he said. “Supply and demand were reasonably balanced in most sectors.”

Schnure pointed out differences in the way the work-from-home phenomenon affected office and multifamily vacancies and rents. So-called “gateway cities,” such as San Francisco, Washington, D.C., and Boston, experienced an increase in vacancy rates and steeper declines in rents in both office and multifamily, while vacancies actually declined and rents grew for both sectors in some smaller cities. The changes for both types of cities, he noted, could be transitory.

“Work from home is having a real effect, but I’m not sure if this is permanent. Some signs suggest this may be temporary,” Schnure said.

Brandon Hardin, NAR’s research economist, expects improvement in the retail sector as the vaccine becomes more available in the second half of 2021. Retail and foodservice sales were already in recovery as of January 2021, he stated, exceeding April 2020 by $155.4 billion for a total of $568.2 billion.

“Retail should attract new customers and retain current ones,” said Hardin, though he did note that the retail rebound does ultimately depend on how comfortable consumers feel going into stores. He said adaptive reuse in the retail sector – repurposing a building to be used in a different way than originally intended – will create opportunities.

E-commerce showed strong growth throughout 2020, Hardin said, totaling $791.7 billion in sales, an increase of 32.4% over 2019. He predicted that e-commerce sales will continue to increase, though the pace may be slower than it was in 2020.

Industrial also emerged as a bright spot in commercial, Hardin said, partly driven by the need to support e-commerce. Warehousing and storage jobs in February 2021 posted year-over-year increases of 72,400 jobs, and industrial posted positive rent growth in the fourth quarter of 2020, as well as occupancy gains for 80% of markets in 2020.

Hardin’s outlook for industrial was optimistic: “Strong demand will continue.”

Gay Cororaton, NAR’s senior economist and director of housing and commercial research, said that land, industrial and multifamily were all bright spots, posting year-over-year increases in sales prices in the fourth quarter of 2020 (4%, 2%, and 1% respectively). In addition, she predicted that office-using jobs could be back to pre-pandemic levels by the second quarter of 2022. However, she noted that the work-from-home trend could continue to impact the office occupancy rate.

“Even if jobs return,” she said, “I think we will continue to see an uptrend in vacancy rates.”

Cororaton predicted positive trends in occupancy rates for multifamily, industrial and retail – and for retail, she included brick-and-mortar stores in that optimistic prognosis.

“Experiential shopping will continue,” she said. “Brick-and-mortar retail won’t go away. People aren’t going to shop only online.”

Source: National Association of Realtors® (NAR)

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