Pandemic impact may weigh on commercial real estate recovery
LOS ANGELES (AP) — The distribution of COVID-19 vaccines is fueling optimism that Americans will increasingly return to the ways they used to shop, travel and work before the pandemic.
That would be a welcome change for companies that own office buildings and hotels, or those that lease space to restaurants, bars, department stores and other retailers. These have been the hardest-hit areas of commercial real estate over the past year as the pandemic forced many businesses to shut down temporarily or operate on a limited basis.
But even as the U.S. economy appears set to roar back to life this year, as many economists now predict, demand trends for commercial real estate could take longer to recover as businesses reassess their post-pandemic needs.
This means higher vacancy rates and declining rents this year, especially for retail and office property owners, said Thomas LaSalvia, senior economist with Moody’s Analytics.
“We see such potential and plenty of anecdotes and early data of actual shifts in how we work and how we shop,” he said. “The structural changes that are going on still give us pause to say that we’ve entered a recovery in terms of office or retail.”
So far this year, the commercial real estate market has seen some positive trends, as many businesses that had to shut down or operate on a limited basis are being given the green light to open by governments amid a pullback in new coronavirus cases and a ramped-up rollout of vaccines.
In March, the national unemployment rate fell from 6.2% to 6% and employers added 916,000 jobs, the most since August. That included 216,000 positions at restaurants, hotels and bars — the sector most damaged by the pandemic.
And this week, the International Monetary Fund forecast that the U.S. economy will grow 6.4% this year. That would fastest annual pace since 1984 and the strongest among the world’s wealthiest countries.
Still, commercial real estate owners face uncertainty as tenants reevaluate their needs. Will businesses that rented office space and spent the last year with most or all of their employees working from home need as much space? Will retailers that shifted more of their operations online during the pandemic cut back on storefronts? Will businesses resume spending on travel after having embraced video conferencing?
The full impact of these assessments may not be known for a while, as commercial property leases tend to run between five and 15 years. Still, some of the economic fallout from the pandemic is already visible in national commercial real estate industry data.
The vacancy rate for retail space increased to 10.6% in the first three months of this year from 10.2% a year earlier, according to Moody’s Analytics. And average effective rent, what’s left after taking out concessions offered by landlords to woo tenants, dropped 1.5%.
Moody’s Analytics is projecting vacancy rates for retail properties will climb to 11% or 12% as businesses reconsider their space needs after last year, when the percentage of retail purchases made online nearly doubled to 20%.
“We actually expect that to rise closer to 25% by 2025,” LaSalvia said. “This pandemic forced a lot of people to pull the bandage off in terms of being willing and able to shop online.”
For office space, vacancies rose to a rate of 18.2% in the first quarter from 17%, while average effective rent fell 1.8%, according to Moody’s Analytics.
Before the pandemic, office vacancies had been trending around 15% to 16% nationally. LaSalvia expects that to climb to 20% by 2022, then decline gradually to 17% by the end of the decade.
Hotels have had it particularly rough. Occupancy rates sank a year ago after global leisure and business travel all but ground to a halt. The monthly occupancy rate had been running well above 60% in 2019 and stood at 65.7% in February 2020. Two months later, it sunk to 20.6%, according to data from Moody’s Analytics.
Occupancy improved to about 45% last summer, before easing again. It was 34.4% in January, down from 66% a year earlier.
Meanwhile, the average revenue per available room, or RevPAR, a key hotel industry metric, was $30.27 in January, down 64% from a year earlier.
Hotel occupancy is expected to pick up this summer, as more people receive a COVID-19 vaccine and feel more at ease about travel. Last month, U.S. airport security checkpoints recorded sharp increases in traffic, including more than 1.5 million people in a single day, the largest number since the pandemic began.
“The summer leisure season will be pretty good,” LaSalvia said. “But the business travel is going to hold us back a little bit this year and it’s going to take maybe a couple of years before that really picks up again.”