What’s next for commercial real estate?

As children return to the classroom, the nation begins to open up and travel resumes, we can expect more of the same in 2021. According to NBC News, at the end of the first quarter of 2021, more than 70 countries are fully open to US travelers and tourists, while 16 are completely closed to Americans. The remaining countries fall somewhere in between. Most require a negative COVID-19 test or some sort of quarantine requirement, and many have curfews in effect.

Looking up

According to Moody’s Analytics REIS, transitions will affect all property types including retail, hotel, office, industrial and multifamily. “Clarity is on the horizon. Prices haven’t fallen enough to register real transitions on any great scale and transaction volume has increased in the past few months.”

In the affordable housing sector — one of the best-performing asset classes of the pandemic, and a subclass that has outperformed even high-flying multifamily — large metro areas have seen outstanding balances of loans increase by 15% year-over-year since February 2020 while average occupancies have decreased by less than 1.5%. The stimulus as well as the nation’s job growth will do their part to have occupancy hold consistent.

Most companies, including Amazon, are targeting the second half of 2021 to return to the office. A CNBC report has indicated Google employees have to apply to work remotely for more than 14 days per year. On the contrary, Facebook and Twitter are allowing remote work indefinitely. Human Resources leaders across the nation are eyeing office reopening later in the year, likely 3rd Quarter. As more vaccinations reach the general public, leaders are re-assessing their positions on exactly when employees can safely return. Until then, their plan is to return with social distancing and mask wearing in place. Given the amount of time many have been working from home, “it will be critical for employers to focus on building social and emotional connections with, and between, their employees again.”

CRE may lag

Moody Analytics’ economists predict that 2021 will be a difficult period for the office sector saying a seismic shift in the demand for square footage is unlikely. A lag in commercial real estate market stress is likely, but will be followed by a “slow and steady return to pre-pandemic rents and vacancy rates.” When assessing the space office users will need, the majority of respondents do not expect large reductions — rather, many reported the need for a slight increase in space. Employers are still requiring employees to be present in the office at least part time. This requires space, and even if the sharing of desks becomes the norm, these desks are likely to be socially distanced. It is also probable that more collaborative space will be needed as office-using employers lean toward bringing in teams on the same days in the hopes of sparking creativity and innovation that my not be replicated on a virtual platform. Moody’s also predicts that professional and business service sectors will grow by more than 20% over the next decade, a forecast that will bolster office demand.

Moody Analytics’ forecast is supported by the reports of significant gains of tenant office tours across the nation, both in person and virtually. While we saw some growth in demand during the last half of 2020, the exponential increase in the first two months of 2021, combined with the announcement from the Biden Administration that all Americans will be eligible for the vaccine by May 1, 2021, is providing confidence that a meaningful recovery is on the horizon. At some point, all things will go back to normal, and it is going to look more like the old normal than most people think.

The bottom line

In summary, 2021 will deliver more of the same as 2020. An investor has been quoted to say that there will always be demand for office space, but with the vaccine rollout and an end in sight for the pandemic, it is bullish on office activity this year, and office buildings are not going away any time soon. As long as workers have a need for community and employers strive for ingenuity and collaboration, there will be demand for office space. As the COVID-19 vaccine becomes more widely available and people feel safe, well amenitized office properties will once again be in high demand.

In Albuquerque we are living the shift from buyers gobbling up all of the available commercial real estate product to those same buyers seeking alternate space to lease. In many cases the footprint of their space is increasing to accommodate social distancing, team meetings and additional employee amenities.