Following a true Black Swan year, it isn’t easy to predict what 2021 will deliver. We all saw disruption across most sectors, deep job losses, and dramatic changes to how we had done business and operated. Simple things we all took for granted, such as going to work and school each day, were all turned upside down.
What follows are our collective views for the coming year.
We don’t claim to have a crystal ball but are merely sharing a diverse, collective experience of our more than 160 years in commercial real estate. We will revisit our view as the year develops—and, since communication and exchanging ideas is key to understanding this recovery, feel free to comment if you agree or disagree with us.
- Expect interest rates to remain low through 2021. With the US economy shrinking 3.5 percent in 2020, unemployment elevated at above 6.5 percent, initial weekly unemployment claims near record highs, and the virus remaining tough to rein in, there is considerable slack in the economy. We have plenty of room for government stimulus before we see any inflationary tendency. We may see interest rate shifts up and down by a handful of basis points, but do not be distracted by the news reports; the Federal Reserve’s direction will be to keep rates low unless inflation rises precipitously, which is not expected over the near-term.
- This slower economy will be a broad drag on occupancy, rental rates, and value but will be dependent on local market conditions and the specific property sector. Conversely, low long-term rates will offer excellent opportunities for owners of stabilized properties to achieve favorable financing. To take advantage of these opportunities, understanding how markets are recovering and evolving in real-time is mandatory.
- While work from home is now popular and will remain to a degree, there will be a rapid move back to the office, assuming a steady vaccination rollout, re-establish corporate culture, true collaboration, staff growth, and retention in late 2021. There will be a more hybrid work from home model. Still, this trend is industry and job function-specific, with many ultimately deciding that more personal interaction and teamwork are critical to achieving their business goals.
- As office tenants return to work on a more widespread basis, expect office vacancy (direct and sublet) to rise as tenants’ real needs are reflected in their footprints, some larger and some smaller. This will put temporary downward pressure on rents through increased concessions. Accurate market knowledge will be necessary to understand the impacts in metro markets and select submarkets.
- Top tenants will continue to demand high-quality space and pay a premium for the best office space. This Class A and A+ space will fare better than lower-quality space due to their better locations and quality of floor configurations, improvements, and building systems. The challenge will be appropriate underwriting of rents, expenses, and lease-up. Depending on the building’s market, location, and actual characteristics, older buildings will struggle versus newer product. The key is to be able to monitor those specific factors and identify opportunities as they arise.
- Industrial will remain a very strong as a sector. Investor interest in data centers will gain strength.
- Multifamily occupancy, rents, and lease-up will remain strong in key markets, although asset revenues may be challenged. Some disruption may emerge in 2021 when eviction moratoriums eventually lapse in urban and suburban locations, disrupting the live, work, shop, and play planning model to which we have become accustomed.
- The lodging sector will continue to struggle into 2022 with demand, room revenues, and other revenues under pressure. Work from home has established remote meeting tools, like Teams, Zoom, etc. This will weigh on business travel into 2022, making travel less popular. While we expect business travel to recover gradually in the medium-term, it will lag the overall economic recovery. Likewise, group/meeting business will follow the business traveler patterns. Tourism/leisure travelers will return first as lockdowns open, but this group does not drive occupancy or room rates.
- Don’t expect widespread re-use of offices or hotels into residential. While a good option in some cases, this conversion is complicated physically and financially and dependent on asset values.
- The “greening” of corporate America will continue to be an important topic. As large office space users return to work through late 2021 and into 2022, tenant expectations for energy efficiency measures and HVAC improvements will increase. The $900 billion COVID-19 relief package, including the extension of the Investment Tax Credit (ITC) for solar projects by two years and the Production Tax Credit (PTC) for wind projects and certain other technologies by one year, is the beginning of more governmental policy initiatives that will provide incentives for real estate owners to continue to reduce energy usage and costs.
Evan Stone is a managing partner at Goodwin Advisors. Art Buser, Robin Sofio, Chris Johnson, and Walt Bialas also contributed to this post.
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