The Key to a Commercial Comeback in 2021

November 9, 2020

Consumers have been shoring up savings during the pandemic, which could lead to a spending spree next year on retail, restaurants, and other businesses—and tipping off a robust commercial real estate recovery, Lawrence Yun, chief economist at the National Association of REALTORS®, said Friday during the virtual 2020 REALTORS® Conference & Expo. “There is a very positive upside to all of this saving,” he said. “There is the potential to unleash savings and power back into the economy once things open up.”

The economy is on shaky ground, with the gross domestic product still down from its peak of $19.3 trillion in the third quarter of 2019, Yun said. He noted that the strength of online shopping during the pandemic has helped to prop up the warehouse sector, for which construction is up 10% year over year. Construction for drug stores and medical facilities also is higher than a year ago. However, construction for offices, hotels, restaurants, and shopping malls is down year over year.

Sales volume across all commercial property types is down year over year in 2020 from the second quarter to the third quarter, Yun said. Between the second and third quarters of this year, industrial sales fell 42%, while office sales tumbled 76%. In addition, office vacancies increased by 74 million square feet in the second and third quarters combined.

Despite the losses, Yun noted that the circumstances aren‘t the same in every market. Offices in some smaller cities have recently seen occupancy rise, possibly due to population shifts away from urban centers because of remote work. “High-priced markets like New York and San Francisco have been hardest hit,” Yun said. “Moderately priced markets like Philadelphia, Raleigh, and Boise are posting gains.”

Overall, Yun predicted that the GDP will see growth in 2021 and end the year up 3%. However, commercial real estate as a whole will lag a bit behind, despite potential growth areas. He predicted the Commercial Real Estate Price Index will be -3% in 2021.

Dr. Sam Chandon, dean of New York University’s Schack Institute of Real Estate, took a deeper dive into the possible outcomes for the commercial sector in a post-pandemic world with an emphasis on the potential impact on the competitiveness of cities. He outlined three possible short-term scenarios for the pandemic and the resulting long-term scenarios for cities and real estate:

  1. A highly effective vaccine with a high adoption rate could lead to the return of pre-pandemic business patterns.
  2. A highly effective vaccine with a moderate adoption rate could lead to an acceleration of trends, such as telework, that existed before the pandemic.
  3. A moderately effective vaccine with a moderate adoption rate could lead to new and persistent changes in the industry.

In the event of the third scenario, which Chandon termed the “inflection hypothesis,” he stated that cities could feel the greatest impact as they work to handle rising unemployment and vacancies. New York, he said, is already seeing unemployment well in excess of the national average.

But Chandon said he believes commercial real estate is a good bet for New York or any other city. And the reason, he said, is property taxes: New York is looking at 3.9% growth in property tax in the 2021 fiscal year. “General property tax is going up,” he said, “even when everything else is going down. Real estate doesn’t go away.”