What Could be in Store for the Commercial Real Estate Market in a Pivotal 2021?
January 8, 2021
It would be an understatement to say that 2020 has presented more than its share of challenges. With a tumultuous year now in the rearview mirror, commercial real estate professionals are looking ahead to what could be a very different 2021.
It’s hard not to be moved when you see truckloads of vaccines starting to make their way across the country. This brings hope that there is a light at the end of what has been a long and dark tunnel over the last 10+ months. The big question in the industry, of course, is how far away is that light—and how brightly can we expect it to shine?
With that in mind, here are some projections, trends and timelines for 2021 that might start to answer those questions.
Activity picking up
If there’s one “sure thing” on the list of 2021 predictions, it’s that activity will pick up—possibly in a dramatic fashion. An active transaction landscape is to be expected. Pent-up demand from those that postponed decision-making amidst the uncertainty and economic stresses of the pandemic will fuel a spike in deal-making.
Caveats and concerns
While the end-of-year numbers are likely to reflect a significant increase in volume, there is definitely some concern that the next 2-3 months could be very hard. With the finish line in sight, consumers may be wary of taking unnecessary risks—especially at a time of seasonal vulnerability. Additional government action and possible restrictive measures could also contribute to a lean first quarter.
As for specific commercial real estate sectors, expect to see office performing better than what analysts suggest. There is real excitement about the potential to be back together with colleagues in a collaborate and creative environment. When it becomes safer to do so, office should pick up nicely. Industrial continues to be the darling of the industry, with e-commerce and manufacturing needs on the rise. Fueled by low inventory across the board, industrial is a good bet to continue to perform well in the months and years ahead.
The hotel segment will certainly follow personal sentiment and risk tolerance/perceptions. Leisure and weekend hotel segments will bounce back fairly quickly toward middle-to-late 2021, but business travel, especially in urban centers, will be slower to recover. While some portions of commercial real estate have weathered the storm because of longer term leases, hotel business falling off a cliff has had a dramatic short-term impact on cash flow. While Hotels could also be among the slowest commercial real estate sectors to respond, there’s a strong possibility that 24 months from now, we are all going to wish we’d bought low on hotels.
While we’ve seen plenty of headlines about urban residents fleeing for the suburbs during the pandemic, a downtown resurgence will inevitably need to be fueled by Millennial appetites. Cities still have so much to offer as vibrant centers of social, civic and professional life. There has been significant literal and figurative investment in urban centers that a real long-term drop off seems unlikely. If you dig into the numbers, you see that many who have left for the suburbs are those who were already going to move in the next year or two (young parents, for example). This simply creates new opportunities for new urban residents to move in. It would not surprise me if occupancies and absorption rates are higher by the end of 2021 than they have been in some time.
Hot and cold markets
As for specific markets and metro areas, there has been some anecdotal discussion about warm-weather cities performing better, with places like Austin and Raleigh cited as evidence. However, there is actually little evidence that market strength is weather dependent. After all, New York City and Chicago are not famous for their warm weather—but have been home to some of the greatest startups and corporate success stories of the past century. We are seeing lots of activity in markets like Miami, Atlanta and Austin, but that’s probably more about available educated workforce and a relatively favorable tax landscape.
As we move into 2021, historically low interest rates and plenty of available capital means that the cost of capital is as low as it has ever been. Retail decision-makers who know where they want to be and what they want to own can and should act on it. Now is the time to be financing anything you have conviction on in the long term.
Reshuffling and reemergence
When the dust settles, the commercial real estate landscape is going to look very different than it did in pre-pandemic 2020. While the final contours of what that new landscape looks like might not be clear for some time, the first big structural changes should start to manifest over the next 6-12 months. There will be a significant reshuffling of tenants as the final verdict comes in on who’s made it, who hasn’t, who will have to downsize or make other changes. We will start to see new brands and concepts emerging to fill some of those gaps. The good news is that America’s fabled entrepreneurial spirit will ultimately prevail. Creativity and entrepreneurship in retail, dining and entertainment is likely to fuel a resurgence in 2021 with very active transaction volumes across the commercial real estate landscape.
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