The Counselors of Real Estate released its top 10 list of issues that will impact commercial real estate throughout the rest of 2020 and into 2021. In little surprise, COVID-19 topped the list.
In its list, the organization says that the changes brought on by the coronavirus and its aftermath will teach the commercial real estate industry about priorities, resilience and demand in ways that the industry dared never test before.
Some of the key questions that the Counselors of Real Estate bring up? Will consumers be willing to shop in crowds again? Will they be willing to sit in movie theaters? Will they want to live close together in urban developments?
As the organization says, much depends on whether social distancing habits persist and require reduced density in airports, stores, restaurants, theaters, offices and government buildings. If it does, this could require larger spaces and result in higher costs.
“Real estate is a lagging indicator,” the Counselors of Real Estate writes in its report. “With the economy expected to take a few years to recover from the effects of COVID-19, our industry will show ripples for a few more.”
The second big issue that commercial real estate faces? Economic renewal. The counselors write that even before COVID-19 hit, there were several statistical signals of deceleration in the commercial real estate industry.
Annual job growth in the United States had dropped from roughly 3 million in early 2015 to about 2 million in 2019. Industrial production expansion peaked in mid-2018 and had decelerated into negative territory by late 2019. Growth of the labor force had declined from the double-digit pace of the final three decades of the 20th century to less than 8 percent from 2000 to 2019.
The economic impact of COVID-19 and its shutdowns have now added to the economic uncertainty faced by the country. As the counselors’ report says, significant segments of the economy are now debilitated. Leisure and hospitality, retail, air travel and construction can all expect slow and partial rebounds into 2022.
The report points, too, to the impact of the lockdowns on state and local tax revenues, something that could reduce non-federal government employment levels and shelve infrastrucure projects. This, according to the report, suggests a “W”-shaped recession that would include a second contraction following the initial improvement of a partial economic re-opening.
The counselors say that for the decade of the 2020s, the economy will be constrained by long-run potential GDP growth that is a weak 1.5 percent to 1.6 percent.
“That is the ‘new normal’ for which we need to prepare,” the report says.
The counselors’ third most important issue is capital market risk. As the report says, the COVID-19 pandemic has shown that debt and equity capital liquidity can stop flowing quickly when risk and returns are difficult to measure.
Since the middle of March, volatility has spiked, which makes pricing debt more challenging. And while federal intervention helped, it doesn’t mitigate the longer-term concern about defaults and losses. As the report says, late payments and loan defaults have seen a significant increase.
The counselors’ report points to REITs, which took a significant hit early in the pandemic. According to the Counselors of Real Estate, the commercial mortgage REIT sector is down more than 36 percent year-to-date. Several commercial mortgage REITs are down more than 50 percent.
Public and private debt was the fourth biggest concern in the counselor’s top-10 list. And some of the numbers that the organization pointed to in making this case are frightening. As the report says, the U.S. national debt has now risen to more than $26 trillion from $23 trillion just six months ago. That comes out to $210,000 for every U.S. taxpayer.
Student loan debt is now approaching $1.7 trillion, higher than the total credit card debt in the United States of $1 trillion. As the counselors’ report says, this financial burden on the largest demographic group in the workforce, Millennials, will inhibit housing investment and consumption behavior, which will negatively impact retail, auto purchases and leisure spending.
Total personal debt in the United States is now higher than $20.5 trillion. That comes out to more than $62,000 per resident of the country. As the counselors’ report says, this level of debt is not sustainable and will impact commercial real estate in many ways, from reduced demand for housing to interest rates that will eventually have to rise to attract new capital. It will also affect the country’s ability to repair and upgrade its aging infrastructure and fund projects such as 5G wireless.
For a look at the counselors’ additional top-10 list items, view the organization’s report here. The organization’s other big concerns for 2020 and 2021 are the country’s lack of affordable housing, the flow of people within and between countries, the way COVID-19 will impact the design and use of new real estate, the rise of technology in commercial real estate, the challenge of repairing aging infrastructure and the importance of ESG, Environment, Social and Governance, issues.