On June 19, 2020, Spencer Levy, chairman of Americas research and senior economic advisor with CBRE, shared his insights regarding economic recovery, CRE and the road ahead as part of CREW Network’s Virtual Spring Leadership Summit.
Levy’s informative dialogue with CREW Network CEO Wendy Mann was an important follow up to his March 20 Virtual Conversation Corner (member login required), when he characterized the COVID-19 pandemic’s impact on commercial real estate as “a shock of a different color.” During the session, Levy provided his perspective on how our economy and industry would be affected by COVID-19.
In his follow-up conversation, Levy shared that he fields two major questions regularly, regarding optimism and the future of office. While he feels he has been slaying dragons among a universally negative outlook, he is “sticking with the optimism camp.” He is often asked, “Where does it end?” And, “What does CRE look like after?” For answers, he looks to “comps.” He also looks to Asia and facts on the ground in China, which is now close to full capacity. “Every Starbucks there is open.” Both the economy of China and the US economy presently reflect a significant amount of pent up demand. While big conference centers and hotels that rely on tourism will continue to struggle, he anticipates that “drive-to” hotels and restaurants will bounce back as consumers are eager to travel and dine out again—but with precautions.
From a macro perspective, unprecedented amounts of federal monetary and stimulus raised up the bottom and “boosted us up from how far we might have fallen,” and while unemployment is abysmal, it is not as bad as it could have been. From a micro perspective, CBRE manages ~8,000 assets across the U.S. and tracks collections on a daily basis. Collections are better than expected across the board, which without the Paycheck Protection Program (PPP) and unemployment insurance, could have been worse:
· Industrial - 85%
· Multifamily - 90%
· Retail improved - 56 to 60%
· Office declined - 85 to 80%
Industrial and multifamily are anticipated to have the strongest outlook. In one camp, industrial assets come back after year one, and will come out shining better than the rest, particularly last mile industrial and cold storage. Multifamily student housing, senior housing and co-living will suffer, but overall trends positive long term due to demand and housing needs. While retail did improve in May, retail and hotels are expected to take longer.
Office will bounce back in year two. Part of what’s missing in office right now is that buyers and sellers are far apart on what properties are worth. The market needs to go through the price discovery process to gain clarity based on how a return to offices brings vacancy rates back up, and to what extent companies reduce their office space as more employees work from home longer-term. Until this gap closes between buyers and sellers, the office sector will be challenged. While negative headlines about employees not needing to go back dominate, Levy reminded us that people go to the office for the “want” factors: to help attract/retain talent. It makes people happier and more productive, allows us to develop the soft skills needed to get ahead, and fosters culture, relationships and communication. For these reasons, he doesn’t foresee that companies will dramatically reduce their office space in response to the pandemic.
Short term changes for office for the next 12-18 months will be tough, especially in big cities due to concerns about using mass transit and elevators in tall buildings. The pandemic has contributed to an acceleration of the “hub and spoke trend,” where companies have satellite offices in suburbs of big cities. Because of the need for short-term (1-3 year) leases, the future of co-working space is bright due to the demand for fluid, agile workspaces.
Levy shared that we are in the “Age of Responsive Real Estate,” as defined in CBRE’s 2030 Global Outlook, which highlights 10 ways we will experience real estate differently in the next decade. Office space will change perhaps less than we think (less density, more cleanliness, improved HVAC systems). More expensive, newer buildings with wellness and “green” attributes will have the advantage over older ones due to better operating systems like ventilation and open spaces that offer more opportunities for social distancing.
Retail and hotel will take longer; yet there are bright spots. Levy shared that he was traveling for his son’s baseball team to a Comfort Inn in Richmond, Virginia, and it was packed. It will be harder in business travel hotels and the international hotels. The most resilient markets are in New Jersey, while the least resilient markets are in Hawaii, where it will take longer.
For the retail sector, malls will get hit as expected and are experiencing another acceleration of a trend—the trend that we can’t go to gyms or restaurants; however, people will go back as soon as the doors open. Until then, “Tenants and landlords…they gotta work it out,” Levy said. We are going to see a messy process over the next few months as courts litigate between retail property owners and tenants.
Again, at the macro level of commercial real estate, Levy shared that local politics matter more than national because they influence which states are more likely to open or close in the event of a flareup of COVID-19. Lower property taxes and ease of doing business move interest and capital flows into the southeastern U.S. in cities like Charlotte, Atlanta, Raleigh and Nashville.
We will experience a V-shaped recovery because of massive federal stimulus, yet in real estate we are in the “Nike swoosh” recovery. Short term, regulators have been incredibly accommodating to certain groups, such as lenders, who received covenant relief until the end of 2021. In speaking with the president’s team, Levy reiterated the need for massive liquidity measures, or we’ll see massive closures. Most big banks are presently only lending to their big relationships, and the capital markets will remain materially constrained through the end of 2020 without liquidity measures.
Levy remains in the optimist camp and “was and still is sticking to it” because he believes facts on the ground bear out. CRE will bounce back, and the bottom won’t be nearly as bad due to federal stimulus and PPP loans, and not nearly as bad as GFC (Great Financial Crisis). In 18 months CRE will be back, Levy promises!
Elizabeth Krol is national client manager for Partner Engineering and Science, Inc., and is both a Professional Geologist (PG) and an ASTM designated Environmental Professional (EP). She provides comprehensive, expedited transactional support services for real estate, legal and financial service companies nationwide. Krol is an active member of CREW Boston and immediate past delegate to CREW Network.
read full bio
More News You Can Use