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NAR, Economists, See Bright Path for Commercial RE

Economists predicted commercial real estate’s future at NAR meeting. The office market still has a wild card, but they’re generally bullish about the overall industry.

WASHINGTON – The U.S. economy experienced one of the swiftest declines in history last year, followed by a quick and relatively significant recovery in the second quarter of 2020.

Speakers at the National Association of Realtors® (NAR) Commercial Economic Issues and Trends Forum, part of the 2021 Realtors® Legislative Meetings & Trade Expo, discussed those historic economic shifts while projecting a favorable outlook for the commercial real estate market in the coming year.

Lawrence Yun, NAR chief economist, predicts that considerable capital will be pumped into the economy in 2021’s second quarter, with consumers eager to tap into a year’s worth of savings and unspent stimulus funds.

“Economic expansion and the jobs recovery will lead to rises in occupancy across all commercial real estate property types,” Yun says. “However, overall consumer price inflation is expected to increase 3% by the end of 2021 and likely will stay stubbornly high through next year, which will increase interest rates to 3.5%.”

Hotels, restaurants, theaters and other entities across the entertainment and hospitality industries are expected to benefit from pent-up demand as many cities have eased or altogether ended pandemic-induced restrictions.

While housing helped prop up the economy over the last year, apartments and rental markets have stumbled in the midst of the pandemic. Yun, however, expects them to regain footing as the broader national economy – particularly in urban areas – continues to recover.

“The apartment sector underwent sudden swings in occupancy – down abruptly in the early months of the pandemic and then sharply rebounding in recent months – but we expect vacancy to drop and rents to rise,” Yun says.

Office rents have also declined over the past four quarters, and it is unclear if new leasing of office spaces will take place, even as more workers return to physical work locations. Yun predicts that office vacancies will remain elevated at 16.5% in 2022, while retail vacancies are projected to settle at 11.5%.

“The industrial sector has been the star throughout the pandemic,” Yun adds. “There’s been great demand for industrial space, and reconversion of some disused properties like older shopping malls can help meet this demand.”

On the whole, the pandemic is leading to sweeping changes in the commercial real estate sector, including modifications to vacant hotels/motels. NAR recently released Case Studies on Repurposing Vacant Hotels/Motels into Multifamily Housing, a report that demonstrates the feasibility of such conversions. Often, those adaptations require public funding, such as the Low-Income Housing Tax Credit, the Historic Tax Credit or tax abatement.

John D. Worth, executive vice president for research and investor outreach at the National Association of Real Estate Investment Trusts (NAREIT), also spoke at the forum and provided a positive forecast for commercial real estate’s future.

“Work from home is the most important question facing the future of commercial real estate coming out of COVID-19,” he says. It’s too early to tell what percentage of workers currently at home will eventually return to offices.

Worth noted that commercial valuations are recovering, but that those improvements are occurring unevenly across various property types, with high returns over the COVID-19 period in REIT funds invested in digital real estate, such as cell towers, data centers and logistics facilities, as well as single-family homes, self-storage and timber.

Share prices are being driven by the strong demand for housing, the surge in e-commerce and the rising price of lumber.

“We’re going to go through a period where companies will experiment with how they use office space, but I’m bullish about the outcome of the office space sector after a period of experimentation,” Worth says.

Both Yun and Worth agree that office vacancy rates will remain elevated compared to pre-pandemic levels as hybrid work models become the norm in America.

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