Wide Variation in Performance Across Property Sectors Expected to Continue
WASHINGTON, DC, Dec. 14, 2020 — Commercial real estate and REITs are likely to continue to recover in 2021, with the pace of improvement driven by the availability and effectiveness of a vaccine, according to a new Nareit report – 2021 Outlook for REITs and Commercial Real Estate: Risk and Resilience. The report projects a stronger CRE recovery, particularly in sectors of real estate requiring in-person contact, in the second half of 2021 and a more complete recovery in 2022 as COVID-19 vaccines become more widely available.
A Tale of Two Markets
According to the report, the performance of real estate sectors has varied throughout 2020 depending on the level of face-to-face interaction with customers that is built into their business models.
“The U.S. economy, including commercial real estate, is on a two-track path made up of businesses that require in-person interaction with customers and businesses that don’t,” said Nareit Senior Economist Calvin Schnure, who authored the report.
Real estate that houses businesses that require in-person contact – like lodging/resorts, restaurants, retail, skilled nursing and senior living – have experienced more significant weakening during the pandemic and face a longer, slower recovery in the months ahead.
Other property segments that don’t require face-to-face interaction, like data centers, cell towers and logistics facilities, recovered quickly from the initial shock of the pandemic last spring and have benefitted from a socially distanced, work-and-shop-from-home economy that has created strong demand for digital communications and e-commerce services.
Sources of Strength Provide Resilience
The commercial real estate market, however, does have sources of strength that have softened the impact of the economic downturn and will continue to do so in 2021. One key source of resiliency unique to REITs is that nearly two-thirds of the REIT industry is comprised of sectors with little direct impact from social distancing.
REITs, which represent approximately 20% of the value of the broader investment-grade commercial real estate market, also entered the downturn with strong financial positions, defined by low leverage, long debt maturities, and high levels of liquidity on balance sheets.,
Other factors have helped soften the impact of the downturn in the broader commercial real estate market. A low level of construction as the industry entered the recession has helped limit the supply of new commercial space and buffer the rise of vacancies.
Outlook for REITs and commercial real estate in 2021
The most important factor for REITs and commercial real estate will be broad distribution of a COVID-19 vaccine and progress against the pandemic. Barring further setbacks in this fight, conditions will gradually return to normal as the year progresses.
There will continue to be wide variation across property sectors in 2021, and it may well be the mirror image of 2020. Those sectors that were most directly affected by reduced travel, business closures, and social distancing, including lodging/resorts, retail, and health care REITs, may have a more robust recovery in 2021. This reflects, however, the larger declines in 2020 that give them more potential for upside gains.
Looking beyond the immediate recovery, it will be important to distinguish between short-term or transitory effects of the pandemic versus long-term or permanent changes to commercial real estate markets. Although data are scarce, there are indications that economic activity tends to return to more normal conditions in countries where new cases of COVID-19 have fallen. There may also be, however, longer lasting changes to how commercial real estate is used. For example, teleconferencing and work-from-home may have long-lasting effects on office markets, as well as hotels, apartments, and single-family home rentals.