Office Will Remain CRE's 'Wildcard' As Economy Recovers

The overall outlook for CRE investment remains strong and is getting stronger for 2021, though office will remain the “wildcard” as companies and workers continue to grapple with how, where, and when to return to physical office space, according to a new analysis by Marcus & Millichap senior vice president John Chang.

“In general, the outlook is strengthening,” Chang said in a recent video. “We’re still not out of the woods yet.  There are still many variables in play. But the accelerating pace of vaccine distribution is promising and it brings with it a strengthening commercial real estate outlook.”

He noted that economists keep raising their 2021 forecasts, with Morgan Stanley bumping their 2021 GDP forecast to 8.1%—potentially the strongest growth since 1950. Goldman Sachs also predicted 6.8% growth, and Chang noted that others are forecasting at least 5% growth this year as well. 

“Of course, all this hinges on the most recent round of stimulus and the US getting enough people vaccinated to fully reopen,” Chang said.  He notes that the addition of the J&J vaccine will speed up the pace of vaccination, bolstering predictions that the US will hit herd immunity by July or August of this year.

That means economic growth could ramp up in the next few months. Jobs will recover, Chang says: while total employment was about 9.5 million jobs lower in February than it was last year, about a third of those jobs were in the hospitality sector. As states reduce restrictions and people begin to feel safer, job creation could accelerate quickly.

Hotel occupancy rates could rise substantially this summer, Chang says, and while the increase won’t hit pre-pandemic levels, it will probably increase to the 60% range depending on location and tier status.

“We could also see a revitalization of retail properties,” Chang said. “Absorption from last year ran negative 26 million square feet, pushing the overall vacancy rate to 5.6% in December. But we could see that trend begin to stabilize.”

Industrial momentum should remain sound as well, with the key risk centering more on new supply than demand. And household formation, which is expected to increase this year as COVID-era households “unbundle,” will also support apartment demand.

“I don’t expect a big change in vacancy rates, because this new demand will be partially offset by tenant churn as eviction moratoriums burn off, Chang said.

And for the office sector, the question, Chang says, is whether lifestyle changes—including relocations to the suburbs—will reverse course. Office could come back relatively quickly or it could take awhile, especially in the urban core.

“As the crisis, hopefully, winds down, I want to reiterate: the competition for assets will begin to rise as confidence returns,” Chang said. “Investors need to closely consider the complications of a strengthening outlook and keep their eyes on the horizon.”