These Trends May Offset Rising Costs for CRE Investors

Job growth, migration to the suburbs and a reignited appetite for travel and entertainment could offset the rising cost of capital across CRE asset classes, according to one industry watcher. 

In a new video, Marcus & Millichap’s John Chang notes that since the beginning of the year, of the 22 million jobs lost at the onset of the pandemic, 96% have been recovered, with all set to be recovered (in net) by this summer. The five cities that added the most jobs over the last year were New York, Dallas, Los Angeles, Chicago, and Houston, while Austin, Salt Lake City and Tampa now have more jobs than before COVID-19. And others, like San Francisco, New York City and Orange County are making “significant headway” toward recovery

“Commercial real estate in these late recovery markets may gain momentum as they move back toward traditional employment levels,” Chang predicts.

And then there’s migration. While many headlines have focused on moves to the Southeast and Southwest, “the majority of the movement was local people moving to the suburbs,” Chang observes. “That trend has been in motion for more than five years as millennials aged into their 30s and began forming families. But the trend was accelerated by the pandemic.”

In 2020, urban apartment vacancy rates surged while suburban areas maintained occupancy, but heading into 2021, vacancy in both areas began to fall.

“While apartment vacancy rates in both urban and suburban areas are at a record low, the strength in the suburbs is readily apparent,” Chang says, noting that businesses are in the process of adapting to this shift as well. And he says this may be a sustained trend as more of the millennial generation opts for the suburbs over cities and as companies adapt in kind.

“That said, don’t count the urban core out,” Chang says. “Yes, these areas were significantly impacted but I think their recovery is starting to gather momentum. A lot will depend however on the strength of economic growth over the next couple of years.”

Lifestyle changes are also important to watch, according to Chang.  As people began to travel more and spend on experiences like sporting events, movies, and theme parks, momentum is also picking up for those sectors. Hotel occupancy has pushed up to nearly 61% with limited service hotels already at a full recovery, and business travel is also showing upward trends in full service occupancy rates.

“Going forward, real estate catering to or supported by entertainment and activities should continue to see performance gains,” he says. “Although inflation and interest rates are the big news items, investors shouldn’t look past the many other trends influencing CRE performance. The momentum created by job gains, suburbanization and reinvigorated travel and entertainment needs will fuel numerous segments of the commercial real estate market, delivering growth potential that could offset the rising cost of capital.”