COVID-19: Research Update XIII
Will McIntosh, Ph.D
Global Head of Research
Senior Associate, Research
Mark Fitzgerald, CFA, CAIA
Executive Director, Research
Senior Associate, Research
Senior Associate, Research
As the economic and real estate conditions continue to evolve in the wake of COVID-19, many questions persist among market participants. The following includes several of the issues that we have contemplated so far this year:
How are the vaccine-related developments impacting COVID-19?
The vaccine rollout in the U.S. continues to gain momentum and has positively impacted the pace of the economic and real estate recovery. In the U.S., over 209 million doses have been administered at a current rate of 3.19 million per day, representing a 25.4% share of the population fully vaccinated and more than 39% having received at least one dose. While some developed nations have enjoyed early success, globally only 894 million doses have been administered and less than 6% of the total population is fully vaccinated. The publicly-available vaccines have shown early promise of a more sustained bend in the new infection rate, with experts suggesting that the U.S. population could reach herd immunity – when at least 70-75% of the masses have received a complete vaccination regimen – in roughly three months.1 While still early, the strong vaccination progress has inched us that much closer to a full return to normal in the U.S.
What does the latest economic and mobility data suggest about the current state of the U.S. recovery?
Based on the sharp rebound in U.S. GDP, strengthening labor and employment measures, and declining volatility in financial markets, it is relatively safe to say that a V-shaped recovery is underway. U.S. GDP rose rapidly during the third and fourth quarter of 2020 and labor markets stabilized. Following the unemployment rate spiking at 14.8% in April 2020, it has steadily fallen to 6% through March 2021. Unemployment claims have hit their lowest reading since the pandemic began, and financial markets have rebounded due to the unprecedented level of economic stimulus, positive investor sentiment, and Federal Reserve commitment to prolonged low interest rates.
With all states either easing or fully lifting restrictions last month, the CNN/Moody’s Analytics Back-to-Normal Index reached a pandemic high of 88%. Looking at the Apple Mobility Trends Report, U.S. Transit recently reached their highest levels since the start of the pandemic. Another auspicious sign comes from TSA, where checkpoint travel numbers have begun to average 1.5 million passengers per day, a 1,400% increase versus this week last year.2 The uptick in mobility trends portend a return to normal life and should predicate the firming of asset values in the more cyclical areas of real estate such as retail and hotels/lodging. Further, it should also lead to an acceleration of leasing velocity in multifamily and office.
Where are CRE values today and have prices become more transparent?
Commercial real estate (CRE) pricing levels have steadily improved since the depths of the pandemic. This month, Green Street Advisors reported that its’ all-property index was down 6% from pre-COVID levels but prices had risen roughly 5% off the lows. Similar to other risk assets, specific real estate sectors benefitted from the pandemic and consequently outperformed. Within CRE, this was most evident in the industrial sector, which saw property values improve 14% from the start of the pandemic. Conversely, the pandemic has negatively impacted most other traditional real estate like retail (-17%), office (-9%), and to a lesser extent multifamily (-4%). Regarding transaction activity, RCA reported that aggregate U.S. commercial real estate deal volume fell 28% over the past twelve months. While transaction activity has not provided a lot of price transparency, volume has increased, and today’s real estate values have held up considerably better than during the GFC.
Notable Property Sector Updates
- Industrial: According to a new report released by Adobe, e-commerce sales activity rose by $183 billion as a direct result of the COVID-19 pandemic, which is equivalent to a 20% increase in online spending. Total e-commerce sales were $813 billion in 2020 or 42% more than in 2019 and are expected to reach $1 trillion in sales by 2022.3 Leasing activity hit a record in 2020, with CoStar reporting over 880 million square-feet of new leases from a variety of tenant types outside of Amazon and other logistics operators. Secular momentum from strong fundamentals and investor interest has led to industrial properties outperforming all other sectors during the crisis.
- Multifamily: Of the recent $1.9 trillion in additional federal stimulus, roughly $47 billion has been earmarked for housing and rental support, and the Biden Administration has further extended the ban on renter evictions through June. Although rent collections declined to 95.9% in March 2021 from 97.2% the previous year, national effective rents have fallen less than 1% on average since the pandemic began according to AxioMetrics.4 Strong demand has caused rents to grow for suburban apartments, but they have softened in urban coastal markets. However, as rents are reduced and concessions are offered, we should begin to see tenants attracted back to the cities. The sector still represents an attractive and durable long-term opportunity.
- Office: While the Work-From-Home phenomenon has had a major negative impact on office space usage, there are some markets where space usage is accelerating. For example, the Dallas metro is leading the nation with respect to in-office work versus working from home.5 Dallas is followed by Austin and Houston; however, other markets like San Jose are just beginning to return to the office. Google recently announced intentions to restart office work beginning in the fall. All things equal, cities with less reliance on public transport have seen the strongest recoveries in office-based work.
- Retail: S. retail sales in 2020 were buoyant despite a recession. Sales reached $5.6 trillion, a 3% increase from 2019. Foot traffic at regional malls has remained approximately 35% below pre-pandemic levels, but strip shopping centers have performed better at less than a 20% drop.6 E-commerce continues to cause brick-and-mortar retail to evolve in accordance with consumer demand and remains the driving force behind overall retail sales growth in the U.S. However, grocery sales were a bright spot within the physical retail space.
As the U.S. economy heals from the massive exogeneous shock brought about by the worst global pandemic in over 100 years, positive signs are on the horizon even as we enter into a second year still under duress. While the COVID-19 pandemic is far from over, significant developments have been made with vaccines now approved and being administered. Added clarity has come to investors by way of Presidential Election results, federal stimulus and accommodative Federal Reserve policy, and the easing or ending of lockdowns and restrictions. Just last month, New York City public high schools reopened for the first time in over a year. Certainly positive signs abound but vigilance is still of paramount importance. Risks remain before a full reopening and complete economic recovery occurs in the U.S., where experts suggest a late-summer timeline if current conditions hold steady. The pandemic has caused secular trends to accelerate but the long-term opportunity in commercial real estate remains intact and extremely compelling. Thus, our focus remains on the enduring opportunities that have either emerged or been accelerated because of the pandemic, combined with a highly selective and pragmatic investment approach.
6 Green Street Mall Sector Update, Placer.AI
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