Some Educated Predictions Regarding the Industry and the Market in the New Year
The massive economic disruption caused by the COVID-19 pandemic has affected US commercial real estate (CRE) in ways that were previously unfathomable. From the spring of 2020 through mid-winter, the real estate markets were in a state of constant flux, throwing the entire industry into uncertainty and confusion.
However, since then, the development of at least three different viable COVID-19 vaccines and the announcements of programs by the various levels of government to inoculate virtually the entire population has returned the CRE industry to a welcome degree of stability. The outlook, once opaque, has now become much clearer. Experts are now confident enough to make some serious predictions.
So, what does the immediate future hold? How will CRE companies retool their operations to better deal with the virus and accompanying changes it has caused in society? Which sectors of the real estate market are projected to perform poorly this year, and which are projected to perform well?
Experienced real estate professional Jonathan or ‘Jonny’ Weiss provides a concise summary of what to expect from US commercial real estate in 2021.
Rapid Digitalization
As CRE organizations do their best to adapt to the new realities prompted by the spread of COVID-19, they find themselves searching for solutions that somehow balance tenant, customer, and employee safety with turning a healthy profit. Maintaining office space as a primary setting for business operations is especially problematic given the high transmission rate of the virus, physical distancing guidelines, and (depending on the area in question) observance of applicable quarantine laws. In most cases, companies have no choice but to shift their operations to digital platforms.
According to a survey by Deloitte, only one-third of companies believe they have the resources and skills required to operate a digitally transformed business. The needs of the moment dictate that this situation will change—and soon. CRE companies that wish to emerge successfully from the pandemic have little alternative but to embrace remote work, virtual property tours, and online communications tools to conduct business. Indeed, organizations that have already made the switch fared much better during the past few months. Besides creating improvements to tenant and customer services, digital platforms offer companies the opportunity to utilize real-time analytics to better exploit leads, identify savings in overhead expenditures, and streamline their core processes. In short, those CRE companies that have not yet invested heavily in digital services must do so over the coming year or else face a staggering competitive disadvantage.
Increased Emphasis on Cyber/Data Security
As with all major changes, though, the industry-wide switch from primarily conducting business in-person to primarily conducting business online comes with a downside claims Weiss. CRE companies deal with a lot of sensitive information, and housing it all digitally, on cloud-based technology, or otherwise, exposes them to new security threats.
Ransomware and other cyber attacks are on the increase. By fully embracing digital business platforms, CRE organizations will necessarily have to increase their efforts to protect themselves from data breaches. A substantial, across-the-board rise in investment in cyber/data security is unavoidable in 2021, as such measures simply become part of the price of doing business.
Sectors Likely to Perform Poorly
Internal industry matters aside, there is the matter of the value of commercial real estate itself. Given the circumstances, it is inevitable that large chunks of properties will continue to suffer from devaluation simply due to a nosedive in the profitability of the businesses that currently occupy them. Among the earliest and hardest-hit by the pandemic, the retail and hospitality industries are in an economic plunge the likes of which has not been seen in the modern era.
There are no use mincing words: the damage that has already been done is extensive, and to many businesses, fatal. It is difficult to imagine a plausible scenario where enterprises dependent on in-person customer traffic such as shopping malls, hotels, restaurants, theatres, and retail-based small businesses will rebound quickly. Projections don’t have these sectors of the US economy recovering to pre-COVID levels of growth until sometime in 2022 or 2023 under even the most optimistic of circumstances.
But there is some reason for hope. With the implementation of wide-scale vaccination, governments will inexorably relax safety restrictions and consumers ought to be more inclined to resume regular activities. The bad news is that the process of vaccinating most Americans may take nearly the whole year to accomplish. However, because warmer weather seems to hamper the spread of the virus, in-person foot traffic is likely to increase during the spring and summer months of 2021 providing these businesses with some relief.
Sectors Likely to Prosper According to Jonny Weiss
On the bright side, the industrial sector—now perceived as more valuable than ever—is thriving, and ought to continue doing so throughout 2021. An analysis compiled by JP Morgan Chase concludes that manufacturing has made a strong recovery during the pandemic, with US factories operating at 70% capacity as of October 2020, up from a low of 59% in April of that year. Companies that manufacture automobiles and automobile parts, computers, communications equipment, and home appliances have posted record profits.
The same is true of all delivery services, with the exception of those reliant on aircraft. Utilities such as power generation and firms that deal in digital infrastructure such as WIFI towers have also performed exceptionally well. Predictably, so has every aspect of the healthcare industry. All these sectors are likely to continue prospering in 2021, as the demand for the products services they provide intensifies as the pandemic worsens.
With a massive, countrywide vaccination program underway, a reasonable amount of stability has returned to the US commercial real estate market, thereby allowing for more dependable short-term forecasts. Contrary to conventional thinking in the early stages of the pandemic, most experts now agree that the CRE industry will emerge from it bruised, but largely intact, as well as newly digitized. Industrial, health care and utility properties will continue to prop up the industry’s overall bottom line in the coming year, with hospitality and small business retail properties lagging far behind.
All things considered, Jonny Weiss claims that whereas 2020 was a year of disruption in the CRE industry, 2021 is poised to be a year of transformation and reconstruction.