If offices, hotels, and other commercial properties survive, their luck should change by the end of next year, according to industry experts.
Hotels, offices and retail stores are expected to see broader economic recovery over the next year. As a result, investors are putting their hopes on a COVID-19 vaccine in 2021. More commercial property will collapse in the first half of 2021 before commercial property begins to stabilize in the second half, experts say. In the meantime, warehouses and distribution centers, the only bright spot in the industry, are expected to become even more valuable.
“As monumental as 2020 was, 2021 could be even more influential as the critical decisions and investment leaders that are making now could bear fruit in the next 12 months,” said Kathy Feucht, global real estate leader at Deloitte, a London-based professional services network.
To weather the end of the pandemic, commercial real estate investors plan to cut costs by an average of 25% in 2021, according to Deloitte. The cost reduction might be short-sighted, however – to keep up with new demands for ventilation, health-related facilities, and digital proptech, operating costs could actually increase by $ 19.40 per square foot in 2021, according to Deloitte.
Investment prospects for private clients. Data and graphics from PwC.
Creation of “dark shops”
More retailers went bankrupt in 2020 than during the Great Recession – especially department stores and apparel retailers. As brick-and-mortar retailers burn through cash reserves and consumers shop online, even more retail properties will be vacant in the first half of 2021 and landlords will default on their loans. Experts predict there will be 20% less retail real estate by 2025, according to the CBRE Group, a Los Angeles-based commercial real estate services and investment firm.
Once the coronavirus vaccine goes on sale in the US, shoppers will be expected to leave their couches and return to brick and mortar stores.
“As we look to the pandemic into 2021 and beyond, we believe that people are dying to connect and gather together, and that experimental retail will thrive again,” said Terry Montesi, CEO of Texas-based Trademark Property Company.
The story goes on
Malls and urban retail in places like New York City and San Francisco have the worst prospects. Empty storefronts are being replaced with health and wellness centers, grocery stores, and other alternative stores, and some retailers have turned to meet the demand for e-commerce.
“We’re seeing a demand for ‘dark stores” where retail sales are fueled not by pedestrian traffic but by roadside collection and same-day delivery,” said Claudio Mekler, CEO of Miami Manager, a private investment firm in South Florida , which owns community shopping centers in Miami-Dade, Broward, and Palm Beach Counties.
Office vacancy rates. Data and graphics from Cushman & Wakefield.
Offices are particularly hard hit by the move to remote work
Most of the office space was empty in 2020. Investors expect workers to slowly return to the offices after the pandemic ends. However, according to CBRE, businesses have adapted to work-from-home guidelines and the move to remote working could permanently cut office demand by 15%.
However, the office market is likely to bottom out and stabilize in 2021. According to CBRE, 85.7% of companies plan to return to the office by the middle of next year. According to Cushman & Wakefield, a Chicago-based commercial real estate services company, the expansion of the economy and population should lead to a full recovery by 2025.
“We expect more pressure on office real estate as some tenants seek to reduce their footprint to respond to larger numbers of employees who are likely to work from home and / or hybrid models even after the pandemic ends,” said Darin Buelow, global location strategy manager at Deloitte Consulting.
The need for office space continues to grow as options for subletting and new builds come onto the market. Vacancies impair the landlords’ ability to negotiate, lower rental prices and create more competition for improvements in air quality, digital technology and flexible rental options.
“Hopefully the decline reflects the 2009 financial crisis when it took us 13 months to bottom out. That means we all know the market direction right now. The faster we bottom, the faster we can recover. ” said Eric Cagner, general manager of Newmark Knight Frank, a US-based commercial real estate services company.
Southern markets like Raleigh, Nashville, Tampa, Charlotte, Phoenix, and Dallas are expected to do better, while tech-intensive cities like San Francisco, San Jose, Austin, and Seattle will have a stronger battle for advancement, but may see strong growth, according to data become CBRE.
“Most companies realize that office space is always needed. Maybe it’s less dense, maybe it’s more flexible to work from home a few days a week. There may be a hybrid situation where companies will continue to use office space and flexibility, ”said Ariel Bentata, founding and managing partner of investments at Florida-based investment firm Accesso Partners LLC.
Hotel loans due. Data and graphics from Trepp.
Hotels are still in trouble
Hotels face a difficult year in 2021. While hotel companies are expected to generate over 50% of their revenue in 2021, the industry is not expected to recover until 2023 – and the most upscale hotels, which frequently offer business and group travel, will take even longer, until 2024 or 2025, according to CBRE.
The slow recovery may not be enough to help hoteliers settle their mortgages. In 2021, $ 30.9 billion of outstanding hospitality loans will fall due, which could cause a record number of hotels to go under – although many indulgent data, analytics and tech companies Trepp have been indulged in, according to New York.
In the worst markets, major cities like San Francisco, Boston, Chicago and New York, 40% to 50% of pre-COVID-19 sales are expected in 2021. However, go to destinations like Jacksonville, Virginia Beach, San Bernardino and Memphis, and Oklahoma City saw up to 75% recovery in 2021, according to CBRE.
“We notice that travelers want to be away from dense populations, but they also don’t want to travel too far to get there. The pandemic has increased travelers’ preferences for socially distant destinations over busy big cities, ”said Gavin Royster, development director for Charlestowne Hotels.
Ecommerce as a percentage of total retail sales. Graphics by PwC.
Bearings are the unexpected champion
Warehouses have been the unexpected proponent of commercial real estate this year, and their success is expected to continue into the next year as logistics companies try to catch up with demand for e-commerce orders. Experts expect 250 million square feet of additional warehouse space demand in 2021, compared to just 211 million square feet per year over the past five years, according to CBRE.
“Industrial should continue to operate as customers demand faster delivery of more products and manufacturing activity increases with on-shoring deployments in 2021,” said Buelow.
Avid investors will have a hard time finding commercial real estate deals, but for investors lucky enough to already own inventory, high rents and low vacancy rates will be a lucrative opportunity – especially in the south, where US population growth is the Demand will drive demand in these areas, particularly Texas, with a projected population growth of 9% over the next five years.
Investment prospects for apartments. Data and graphics from PwC.
Apartment buildings will be solid performers
Although initial reports indicated that homeowners would struggle to collect rent during the pandemic, multi-family houses, such as apartment buildings, held up well compared to previous recessions amid the coronavirus pandemic. And these property types are expected to continue with solid demand in 2021.
“Housing is a fundamental need, so there is always demand, especially at more affordable prices – and take advantage of historically low interest rates,” said Jon Morgan, co-founder and CEO of Interra.
While rental rates fell in urban areas like New York City and US rental rates stagnated overall in 2020, rental rates in most of the US have already stabilized and are set to recover in 2021, according to Yardi Matrix, an Arizona-based commercial property data company .
Sarah Paynter is a reporter for Yahoo Finance.
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