COVID-19: Research Update XII


Will McIntosh, Ph.D
Global Head of Research

John Kirk, CAIA, CCIM
Senior Director, Research

Mark Fitzgerald, CFA, CAIA
Executive Director, Research

Karen Martinus
Senior Associate, Research

Chenchao Zang
Senior Associate, Research

Jane Zheng
Associate, Research

October 15, 2020

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 in recent weeks:

What does the recent labor market data suggest about the U.S. economic recovery?

Labor conditions seem to confirm that the pace of the economic recovery is decelerating. The Bureau of Labor Statistics reported a gain of 661,000 jobs in September, down from 1.5 million jobs in August and significantly lower than the peak of 4.8 million jobs gained in June. While the unemployment rate declined to 7.9% in September from 8.4% in August, this improvement was primarily due to a labor force contraction.  The labor force participation rate (which tracks the percentage of all working-age people employed or actively seeking work) stands at 61.4% today. It is down 200 basis points from its pre-COVID level due mainly to the 2.5 million people who have permanently left the labor force since February.[1] Also, 28 million workers continue to receive some form of unemployment benefits. Despite the sluggish labor conditions, the Moody’s Analytics & CNN Business Back-to-Normal Index, which compares a broader set of economic indicators against pre-pandemic levels, has remained steady the last two months, suggesting the economy continues to operate at about 80% of normal. Looking ahead, without federal stimulus and income support, much of which expired over the last two months, the economy risks unwinding the progress achieved since the recovery began. Today’s rise in first-time unemployment claims seems to suggest that the lack of stimulus is having some impact.

What has the recent price discovery revealed about the health of the commercial real estate market?

Commercial real estate (CRE) pricing levels have traded sideways in recent months. For example, in September, Green Street Advisors reported that its all-property index was down 10% from pre-COVID levels, flat from the month prior. Still, there is significant variability amongst property sectors. For example, Industrial is the only major property type that has experienced positive growth (+2%) since the pandemic began. In comparison, the epidemic has severely impacted Multifamily (-8%), Office (-9%), and Retail (-18%). On the transaction front, U.S. commercial real estate deal volume is down 68% year-over-year, according to RCA.  However, refinancing activity has surged, accounting for 50% of all capital flows to the sector this year, well above the 30% represented by new acquisitions and the 20% allocated to construction. While property owners were mostly unable to refinance assets during the Global Financial Crisis (GFC), credit has been more readily available during this downturn.  Consequently, the CRE pricing environment has been relatively stable, and with fewer fire sales thus far.

Does the CMBS market suggest that distressed buying opportunities are on the horizon?

In September, the CMBS delinquency rate fell to 8.92%, improving after a near all-time high of 10.32% in June.  Several loans that were initially marked delinquent in the early days of the crisis have been reverted to current status after receiving forbearance. According to Trepp, however, the declining delinquency rate may be overstating the CMBS market’s improvement.  Investors might be better served to monitor the special servicing rate, which continues to trend higher.[2] The primary difference between the delinquency and special servicing rate is that, while forbearances may cause a loan’s status to switch from delinquent to current, the special servicing rate continues to track the loan if it is stressed regardless of its current status. Thus, the special servicing rate hit 10.48% in September – the highest level recorded since May 2013, and in the coming months, it could potentially approach the all-time high of +13% achieved following the GFC. With many of the forbearance periods (typically 90-180 days) set to expire by the end of the year, delinquencies may yet rise again as special servicing rates for the retail and lodging sectors are at all-time highs of 18.32% and 26.04%, respectively. While we will continue to monitor the CMBS market, only time will tell if it proves to be a harbinger of things to come in the private real estate sector.

Notable Property Sector Updates

  • Industrial: E-commerce activity rose a staggering 21% from February to September of this year.[3] Consequently, online sales growth has had a tremendous impact on the industrial sector since the health crisis began. A recent report found that e-commerce companies leased 56 million square feet of industrial space nationwide in the first half of 2020[4], compared to only 9 million square feet in all of 2019.[5] Looking ahead, JLL forecasts e-commerce sales to hit $1.5 trillion by 2025, resulting in an additional 1 billion square feet of industrial demand solely from e-commerce tenants.
  • Multifamily: Multifamily fundamentals continue to outperform during the pandemic. Apartment demand rebounded in the third quarter, eclipsing 100,000 units, which is the strongest third-quarter on record, according to CoStar.  CBRE EA estimates that national vacancy rates are hovering around 4.4%, up 80 basis points year-over-year, while still 70 basis points below the average national vacancy rate over the past 15 years (5.1%). National vacancy rates are likely to continue to inch higher given the dire labor conditions, expiring eviction moratoriums, and stalled federal stimulus from Congress.  Still, an 80 basis points year-over-year increase in vacancy is relatively modest, especially when considering that vacancy rates rose 160 basis points year-over-year (from 5.4% to 7.0%) following the GFC.

Concluding Thoughts

The U.S. economy is on the mend.  The labor market is healing, but progress has slowed as federal stimulus and income support expired in the last few months. The CRE recovery has been gradual but steady, and the pandemic’s true impact will be revealed as price discovery continues.  Over the next few weeks, voters will go to the ballot box and elect the next U.S. president. While national polls indicate that Joe Biden is currently favored to win the election, it is still too soon to tell, as pollsters have been wrong before. In either case, our upcoming 2021 House View, scheduled for release later this year, will provide our near-term economic outlook, including the potential impact that the election results might have on CRE markets. For now, much will depend on the path of the virus, which has seen a resurgence across the country. Still, we are hopeful that the subsequent waves will be smaller and less disruptive to the economy and society as a whole.


1 7


3 Per CoStar




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