Thank you to all who were able to attend our first virtual client forum. With the nature of the forum being so different this fall, we understand some clients were not able to be present for the duration of the virtual conference. Please see a short recap of each section below.
During this year’s fall forum, we discussed how global economics and the COVID-19 era are informing our predictions across sectors and markets.
We’re expecting a broad V-shaped recovery, which will slow from this point onward. The recovery, globally, is consumer-led, as illustrated by retail sales figures above where they were pre-COVID-19. Consumers are bouncing back so strongly in part because of the stimulus, which served as a transfer of income to support people whose incomes were hit by COVID-19. High-income jobs have not come back as quickly as low-income jobs, but they were not impacted as badly either. High-income consumers are going to be key going forward.
Immediate risks to the economy include a possible wave of corporate layoffs, an unknown impact of a COVID-19 vaccine, a lack of additional stimulus, and a halt of office-based employment growth. Still, the outlook is for continued recovery.
What is the future for cities? What role are they going to play? Urban submarkets have seen more occupancy loss than their suburban counterparts, mainly because people are not willing to pay in-town rents without open amenities and because people are making health decisions to escape dense areas.
However, some of the trends we are seeing today were apparent before the pandemic and are simply accelerated. For example, some older millennials are making moves to the suburbs and have been doing so for a while.
Also impacting the flock to the suburbs is many people’s ability to work from home. As more corporations build flexibility into their future policies, employees will be able to spread out in suburban markets more than if they were tied to an office building in an urban core.
On the bright side, office tenants have mostly paid their rent and vacancy is relatively stable. The bad news is office employers are slow to recover jobs, slow to return to the physical office, leasing is slow and there is a steady stream of sublease availability. Office leasing recovery is expected to lag one or two years behind the rest of the economy.
Employers are anticipating needing to support a hybrid workforce, with employees in the office 2-3 days a week and remote 2-3 days a week. This is a trend that we would have seen in the future, but COVID-19 has accelerated the timeline.
Occupiers are scenario planning now. They’re exploring how workplace strategy and the role of the office are changing and creating more collaborative space. They are also focused on optimization and looking at flex office space.
EA found that in 2019, 68% of employees worked in the office full-time. Before COVID-19, we expected that by 2030, that figure would drop to 52%. Our “new normal” prediction, after COVID-19 illustrated the ability to work from home efficiently, is that by 2030, only 27% of employees will work in the office full-time.
The pandemic has accelerated the penetration of e-commerce and the retail industry transformation. In Q2 2020, the year-over-year e-commerce growth rate reached 44.5%, thanks to impact of the pandemic. Since the beginning of the year, there have been 9,000 announced closures among national chain retailers. According to the National Restaurant Association, six months into the pandemic, one in six restaurants have closed either permanently or long-term.
However, brick and mortar stores will not be going away. On the positive side, rent collections have been improving and consumer spending is increasing. Despite the prevalent use of e-commerce, some retailers are still expanding, and more are leveraging their physical stores for different purposes, reducing the cost associated with expensive e-commerce and providing more choices for consumers. Although e-commerce will continue to take more shares of retail sales in the long run, brick and mortar stores can still provide convenience, engagement and experience to consumers, which can hardly be replaced.
Growth in e-commerce has boosted demand for warehouse space, and e-commerce transactions make up over 35% of industrial transactions this year. In the short-term, e-commerce is serving as a buffer for industrial, and in the long-term, the increase in share gained is an acceleration of an existing trend.
E-commerce forecasting hinges on several factors going forward: the size of the pandemic spike; the retreat from the short-term spike; e-commerce’s terminal share of retail; and the speed of share gain. EA predicts that e-commerce will account for 30% of retail sales by 2030.
The shape of the hotel recovery is visible in market density and purpose of travel. Upper-tier recovery hasn’t begun yet. A large amount of demand for these properties comes from group travel, which has been suspended. Peak months for corporate conferences are October-December, and unfortunately, group travel will not resume by then.
Leisure travel is more robust, as evidenced by the gap between weekend and weekday demand. A survey conducted in July shows us that 50% of businesspeople do not expect to attend in-person B2B events until spring 2021. The main factors influencing that timeline include the availability of a COVID-19 vaccine and corporations lifting travel bans.
Full-service hotels have been hit hardest, with a 131.5% drop in EBITDA. One reason is their reliance on food & beverage revenue. Luxury and upper-upscale have the highest number of closed hotels, and the rate of closure is similar to the rate back in April.
But the future looks better for hotels. Convention travel will return for several reasons. For every $1 spent on business travel, companies realize $12.50 in incremental revenue. As much as 28% of business could be lost without in-person meetings. And, people want to feel connected. Almost 75% of workers will have flex work arrangements, which could lead to extending business trips. When you can work from anywhere, you can work on the road and this bodes well for hotels.
Yes, multifamily is resilient but the success varies among location and class. As people are leaving urban cores for suburban areas, rents in urban cores are dropping. However, Class C is seeing rent growth and flat vacancy, so it’s possible that people are actually seeking lower rents and not necessarily wanting to flee urban cores.
San Francisco has seen the largest change in vacancy and rent (-14%) since the pandemic started. Through a variety of examples, we saw that almost every market shows that submarkets outside of urban cores are doing better than their in-town counterparts. For example, in New York City, the Bronx and Burrows are doing well, but Upper East Side, Lower East Side, Upper West Side and Midtown are all struggling and will take the longest to recover.
But, on average, we expect a relatively quick recovery, around 2022.
Commercial real estate debt markets are in a risk aversion phase and underwriting is conservative. Lending and loan closings are down 30% year-over-year and 40% since February. Lender competition has shifted toward banks, life companies and CMBS. Quote activity has been sluggish across the board, but there are some CMBS deals in the works. There has been a big spike in CMBS delinquencies, with the largest share stemming from the lodging sector (20-25%), followed by retail (about 15%).
There is a continued flight to quality deals, but a disconnect between buyers’ and sellers’ expectations may cause transaction activity to stall longer. For example, 61% of buyers are looking for discounts, but only 9% of sellers are willing to give those discounts.