COMMENTATOR: Adam Mullen, Market Leader for the Greater Philadelphia Region, CBRE
While the full impact of the global health emergency that is COVID-19 continues to unfold, the effects of this pandemic across the commercial real estate community is being felt in notable ways. Some commercial asset classes will fare better than expected, while others will be significantly impacted in the short-term.
Industry opportunities and challenges are taking root now, and not surprisingly, hospitality and most retail are taking a hit, while the industrial sector is expected to maintain and perhaps even grow. Here is an early snapshot based on what we know today.
Office leasing will slow in the short term, vacancy will rise, and demand will increase for agile workplace offerings. The greatest impact will come in markets with a high concentration of oil & gas and travel & leisure jobs. There is less new office construction in this cycle, which will aid the sector’s recovery.
The economic slowdown will negatively affect most retail, especially retailers and centers already struggling to compete with e-commerce. There is resilience and strength in grocery-anchored and pharmacy-anchored centers. The eventual removal of social-distancing requirements might cause a surge in pent-up demand.
Industrial & Logistics will see a short-term slowdown in leasing, but rents will hold steady. The sector will be a net beneficiary due to strong e-commerce growth and retailers diversifying their supply chains.
Strong demand endures for multifamily assets. Pressure will emerge for most property types due to job losses and resulting economic hardship.
Hotel revenue will decline by an average of 37 percent for 2020, with a recovery beginning in 2021. The impact will be greatest in gateway cities with substantial tourism and convention business. Some hotels may be converted to uses as medical and quarantine facilities.
Overall, transaction volumes for commercial real estate are declining, bidding pools are smaller, and sellers are delaying bringing assets to market. Repricing asks have increased as have deals that have fallen out of contract.
The economic fallout across the country and in most regions of the world is and will continue to be significant, balanced by what is expected to be a strong recovery in the U.S. A global recession has likely already started, and the U.S. also is expected to endure a recession, with GDP declines in the first and second quarter. CBRE sees the U.S. economy stabilizing in the third quarter, starting to recover in the fourth, and growing at stronger rates in 2021 due to pent-up demand.
We also foresee unemployment rising to above 6 percent from 3.5 percent by mid-year, registering a loss of as much as 8 million jobs. However, the federal stimulus package of $2 trillion or more and the associated liquidity support will prevent worst-case economic scenarios from happening and will help underpin the recovery.
While debt financing remains available, it is constrained and will remain so until stimulus programs are approved, implemented and begin to gain traction. Government-sponsored entities (Fannie and Freddie), banks and life-insurance lenders generally have ample capital with minimum interest-rate floors or higher spreads. CMBS and debt funds are under duress; some have exited while others are repricing.
Based on the length and success of the containment activities, this outlook may change and we at CBRE continue to stay focused on the overall impact of COVID-19 on the economy and the commercial real estate industry.
CBRE is the world’s largest commercial real estate services and investment firm. Based in Philadelphia, Adam Mullen leads CBRE’s Greater Philadelphia Market. [email protected]