Commercial Real Estate Recovery Possible Later This Year

May 11, 2020

Even as the reported economic numbers for the first quarter of 2020 ended on a dismal note, auguring a difficult second quarter for commercial real estate, Lawrence Yun, chief economist for the National Association of REALTORS®, took a longer view. He highlighted opportunities for commercial real estate at the Commercial Economic Issues and Trends Forum last Friday during the REALTORS® Legislative Meetings. While some sectors like restaurants and retail may be in for a rough time, he noted that other sectors like industrial may, in fact, see improvement. In addition, the massive federal stimulus package may have some mitigating effects, and as more businesses begin to reopen, the second half of the year could see a rebound for the economy.

Savings May Be Key

According to Yun, the first quarter of 2020 was grim with few bright spots. GDP fell 4.8% over the same quarter last year, consumer spending was down 8%, and business spending dropped 9% However, during that period, personal income grew 2%, and personal savings were up a remarkable 152%—a trend Yun anticipated because much discretionary spending by consumers has temporarily stopped.

The massive $2.2 trillion CARES Act and supplemental $484 billion in stimulus have had a mitigating effect on soaring unemployment, ensuring that people still have some money in their pockets. The average unemployed worker is receiving $1,000 a week in stimulus according to Yun, and current stay-at-home orders have curtailed social activities, leading to higher savings. “That savings could be the key to a ‘V’ recovery,” Yun explained, “a sudden pop up after the decline when people start to spend again.”

Real Estate as Inflation Hedge

In contrast to the troubling unemployment situation, Yun said that no immediate urgency exists where inflation is concerned. There is no sign of Consumer Price Index inflation for now, and residential home prices are holding firm as a result of low inventory levels.

The federal budget deficit, however, is cause for concern in terms of future inflation. Federal spending is projected to hit $4 trillion in 2020, and the Federal Reserve is printing money to cover debt—something Yun advises will naturally increase the risk of inflation in the future.

He offers three possible inflation hedges: gold, bitcoin, and real estate, and he is optimistic that real estate will attract safety-minded investors.

Commercial Real Estate Numbers Take a Hit

Commercial real estate indicators are down across most sectors, according to the latest NAR surveys of REALTOR® members. Amongst the findings, Yun reports:

  • Sales transactions contracted in both small and large commercial markets in the first quarter of 2020.
  • Fewer respondents reported year-over-year sales gains in the first quarter of 2020 compared to the fourth quarter of 2019.
  • Commercial sales prices increased at a slower pace in the first quarter of 2020.
  • Cap rates compressed in the small commercial markets, but slightly rose in the large markets.
  • Vacancy rates rose in all markets in the first quarter of 2020 compared to the fourth quarter of 2019.

Outlook

Yun predicted that the second quarter of 2020 will be worse than the first, and although there will be some recovery in the second half of the year, it will be insufficient to reverse the losses of the first half.

For 2020, he forecasts that GDP will be down 4.5%, jobs will be down by 4 million, and commercial prices will be down 10% to 13%, with the third and fourth quarters showing improvement as the economy opens up. For 2021, he forecasts gains across the board, with GDP up 3%, job gains of 2 million, and CRE prices up 1% to 3%.

When the economy does open up, however, and recovery begins, Yun cautioned that office space needs will not rise commensurate with job creation. Post-pandemic offices likely will feature workers participating in more virtual meetings and more remote working, requiring less physical space.

Commercial real estate professionals will have to get creative to find new markets and uses for empty office and retail space. Among the solutions Yun proposed are the “healthcare armory,” in which empty malls are repurposed for use as production sites for medical equipment or as space for hospital beds. In addition, tax incentives for home office use and mixed-use buildings that include office, residential, and retail together are key items REALTORS® can start advocating for that will help the commercial market thrive in the future. “It will take some creative commercial practitioners to talk to the mayor, talk to their officials,” Yun said. “REALTORS® need to make noise.”