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Looking Ahead: Real Estate Predicts and Prepares for a Post-COVID-19 World

As the world emerges from a COVID-19 cocoon, it will find a real estate landscape that has been changed in multiple ways, predict reports from research firms, associations and full-service industry firms.

In some ways, the pandemic merely exacerbated existing trends, observers note. The struggling retail sector continues to seek ways to deal with a public that became exponentially more dependent on e-commerce in 2020 and came to appreciate the convenience. As a result, the industrial sector, which had had strong investment appeal even before the pandemic, will remain a favored sector.

“COVID-19 did accelerate many existing trends but at varying rates, as well as in some new directions. It also spawned some new trends, while stopping other existing trends dead in their tracks,” notes PwC and the Urban Land Institute’s “Emerging Trends in Real Estate.”

The economy should bounce back well, according to the National Association of Realtors’ (NAR) “2020 Consensus Forecast,” which compiles a median of the responses from 23 economic and housing market experts. After declining 2.7% in 2020, U.S. gross domestic product should rise 3.5% in 2021 and 3% in 2022. Unemployment, at 6.9% last year, is predicted to drop to 6.2% this year and 5% in 2022.

There’s good long-term news for retail, which was devastated by government-mandated brick-and-mortar store closures and continued restrictions on occupancy. As of December 18, the U.S. saw 8,688 store closures in 2020, according to Coresight Research.

However, as stores reopen and capacity increases, the reliance on e-commerce should decline, with the rate of sales growth declining for the first time since 2008, said CBRE’s “U.S. Real Estate Market Outlook 2021.” Even so, there will still be pain to come: expect more closures as weaker players, such as department stores, apparel retailers and experiential users such as restaurants, gyms and theaters, continue to deal with COVID-19-related fallout. The firm expects a 20% reduction in total U.S. retail real estate inventory by 2025 as Class B and C malls are converted to other uses.

“Although the retail footprint will continue to contract in 2021, what remains will be stronger, more interesting, more convenient and more experiential,” said the CBRE report.

It should be noted, however, that stores are still opening; the Coresight Tracker also notes that 2020 saw 3,368 store openings. Those concepts that are expanding will have prime locations and, possibly, motivated landlords to negotiate strong deals.

“Digitally native brands, medical uses, health and wellness, automotive showrooms and service centers, pet services, franchisee-driven operations and salon suites will capitalize on opportunistic market conditions. Grocers, convenience stores and quick-service restaurants will also grow aggressively,” said the CBRE report.

After retail and restaurants, the office sector was clearly the most affected by the pandemic. Some companies that sent employees to their homes in March began bringing them back during the summer. Others are biding their time as vaccines are widely distributed. By mid- November, just 17.3% of New York area employees had returned to their workplaces, according to Avison Young’s “Forecast 2021” report.

“Whether or not this percentage could grow to 50%-plus in April or June remains to be seen,” the report said.

In its Manhattan Monthly Snapshot in November, Newmark reported that Manhattan asking office rents declined for the seventh straight month to $77.46 per share foot, and vacancy had risen to 15%.

But the trend is not likely to last. The NAR sees the percentage of employees working from home continuing to decline nationwide, from 21% in 2020 to 18% in 2021 to 12% in 2022. There are simply too many advantages, including productivity, innovation and corporate culture, to a traditional office structure, observed the Cushman & Wakefield October 2020 report “Purpose of Place: History and Future of the Office.”

“COVID-19 has been a drastic and society-changing experience that has greatly impacted office workers around the globe,” the report said. “We expect the shift towards 100% remote work by employers for their office workforce is very unlikely outside of a singular event like a pandemic.”

Where will those workers return to? Largely, right back where they were before, but over a period of time. Some workers, spooked by long commutes and crowded cities, may be reluctant to return, at least at first. To accommodate them and encourage a work/life balance, some employers may even institute a “hub and spoke” model, opening smaller satellite offices (possibly boosting co-working spaces) to keep employees who’ve become accustomed to no commuting time. CBRE expects suburban office markets to recover more quickly than urban locations this year.

But “almost all the interviewees believe that the gateway markets of Boston, Los Angeles, New York City, San Francisco and Washington … will eventually regain their broad appeal and vivacity (some say they never lost it) due to their dominance in entertainment, finance, technology and education,” the PwC/ULI report said. “The next three to five years could be difficult as demographics favor suburban locations, and restrictions on public transit, office and retail/restaurant density and live entertainment — and individuals’ concerns about them — make big-city life less appealing. But, like many of the changes that have occurred due to the pandemic, the ultimate impact on the desirability of large cities will be on the margin. … Cities will likely creatively adapt, perhaps adding more green space and outdoor activities and continue to improve livability to retaining and attracting residents who continue to value an urban lifestyle.”

Part of this decision will depend on the overall cost per employee, as COVID-19 has forced many tenants to take a closer look at costs.

“The office will continue to play a vital role in all aspects of business, and the workplace experience must be able to support interaction and collaboration at a variety of scales for both the in-office and remote worker,” Avison Young predicted.

The growth in e-commerce may slow in the year ahead, but demand for warehouse space remains high. In an effort to avoid the supply chain disruptions of 2020, manufacturers and retailers may choose to keep more inventory on hand, increasing the need for space. One answer — converting shuttered retail space into distribution centers.

“There is strong demand for in-fill warehouse space in urban cores, but land constraints and high costs have limited new development,” CBRE said, predicting industrial completions will jump 29% over 2020.

Counterintuitively, despite high unemployment as a result of the pandemic, the housing market was on fire in 2020 and shows no signs of slowing down. Home sales rose 3% year-over-year in 2020, and NAR is predicting a 9% year-over-year increase in 2021.

“The ‘second-order’ housing demand arising from remote work flexibility and changing housing preferences will continue,” said NAR Chief Economist Lawrence Yun at the association’s annual conference in November.

Pricing of existing homes is increasing because of lack of supply. New construction continues to boom around the country. Interest rates are likely to remain low, with 30-year fixed-rate mortgages rising from 2.7% to around 3%, predicts tech-based brokerage Redfin.

“The housing market will remain strong through 2021 as the economy recovers from the pandemic-driven recession,” said Chief Economist Daryl Fairweather in Redfin’s “2021 Housing Market Predictions.” “Later in the year, the worst of the pandemic will hopefully be behind us, and as businesses reopen and daily activities become safer, a new batch of homebuyers and sellers will enter the housing market, making for the strongest year of home sales since 2006.”

The exodus from New York early in the pandemic may take time to resolve, but most observers expect most residents who fled to return and for cities to attract newcomers once relocation is safe.

“I think 2021 in New York City will be a city that continues to reel from the fallout from COVID-19, change in the work environment and the devastation in the retail market. We will continue to see uncertainty and people come and go,” said Shaun Osher, founder and CEO of CORE. “For smart investments in 2021, I’d recommend looking at prime neighborhoods that were the most expensive pre-pandemic, i.e., Tribeca and the Upper East Side.”

Despite loss of rents during the pandemic, multifamily also remained comparatively solid and is likely to bounce back strong, predicts CBRE, which foresees a 6% increase in net effective rents and a full recovery by early 2022 as the economy recovers.

Expect 2021 to be much more “normal” than 2020. But the pandemic has unveiled disturbing disparities, noted “Emerging Trends.”

“After the economy works through the initial pain of this recession, the current and, possibly, the long-term, implications are likely to be uneven across industries, metro areas and property sectors,” the report said. “The economy may well settle into moderate year-to-year growth over the rest of the decade, but the real estate market will find itself looking at a growing number of uncertainties beginning in 2021.”

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