Archives for April 2021

Retail real estate registered a slight uptick in conditions in the fourth quarter of 2020, according to a new outlook on the sector from JLL, and a few major markets across several key US regions are poised to come out on top.

When it comes to retail’s recovery, location is king. JLL notes that the pandemic has created winners and losers: “essential retailers continue to be crucial for day-to-day life, and discretionary retailers struggle with closures and consumers’ tightening budgets,” the report says. “But there is another bifurcation taking place—one of location.”

Sun Belt markets, particularly those across the Southeast, are experiencing strong rent growth, while markets hard-hit by COVID restrictions in the Northeast and California have seen declines. Nashville posted a 6.5% rent increase in the fourth quarter, while Raleigh saw an increase of 6% and Atlanta clocked in up 1.9%. Meanwhile, New York saw a decrease of 5%, San Francisco registered a 4.5% decline, and Boston posted losses of 3.1%, according to Costar data.

The Sun Belt also posted growth in transit mobility, which translates into more shopping, JLL says. In Miami, which saw 0.1% rent growth in Q4, transit mobility is recovering at a pace well above most metros and is now only 7% lower than pre-COVID levels. In dense urban cores, where indoor gatherings remain heavily regulated, transit use remains low. But in less concentrated metros in the South and in the suburbs, retailers are increasingly reporting more foot traffic in stores.

Similarly, consumers are flocking to these Sun Belt regions and cities across the West as the pandemic continues to upend normal physical office demands and WFH becomes more mainstream. The top state for inbound migration was Idaho; other top spots include Arizona, Oregon, the Carolinas, and Florida. The top states for outbound moves, the report notes (citing a United Van Lines study) included densely populated and expensive New York, Illinois, and California.

The office markets in Sun Belt and Western cities have also benefited from these migration patterns: in another recent report JLL predicts that the real winners over the next 36 months will be Sun Belt and Mountain West submarkets, which the firm estimates will outperform gateway cities in office absorption and rent growth as companies relocate offices and adopt more distributed work models.

Source: “The Sun Belt and American West Will Be Retail’s Big Winners This Year”

As the pandemic winds on, the big question of what will ultimately unfold for the hard-hit office sector is on everyone’s minds. But a recent analysis by Moody’s Analytics economists say clarity is on the horizon, with 2021 likely functioning as a “transition period” for the troubled asset class in many markets.

Economists Barbara Byrne Denham and Thomas LaSalvia predict that 2021 “will be a difficult period for the office sector,” though they say a “seismic shift in the demand for square footage is unlikely.” A lag in CRE market stress is likely, they say, but will be followed by a “slow and steady return to pre-pandemic rents and vacancy rates.”

Among large cities, the roster of post-pandemic office standouts include the usual suspects of Austin, Denver, and Raleigh. Phoenix and Raleigh closed out 2020 with year-over-year reductions of a minimum of 60 basis points in office vacancy rates, according to Moody’s Analytics Reis data, the economists note in their report. The experts’ annualized average effective-rent 2021 forecast for so-called “old guard” office markets like Chicago, New York City, Los Angeles, and San Francisco clocks in at negative 8.3%.

And while they stop short of declaring “the death of density or the end of large, ‘old guard’ business centers,” Denham and LaSalvia do forecast “a divide between the emerging and old-guard cities to continue over the next couple of years before both sets of markets recover later this decade.” They also expect the percentage of workers who engage in remote work at least a day a week to “rise considerably” post-COVID, citing US Bureau of Labor Statistics and Atlanta Fed data showing that more than 40% of office workers were working remotely at least part time in 2020.

But despite this data, Denham and LaSalvia note that in June, the Atlanta Fed revisited its survey and asked employers about their predicted space needs going forward.

“Not only did the majority of respondents not expect large reductions, but many reported the need for slight increases in space,” Denham and LaSalvia write. “Why the seeming contradiction? The simple answer is that many employers are still requiring employees to be present in the office at least part time. This requires space, and even if the sharing of desks becomes the norm, these desks are likely to be socially distanced. Additionally, it is probable that more collaborative space will be needed as office-using employers lean toward bringing in teams on the same days in the hopes of sparking creativity and innovation that may not be replicated on a virtual platform.”

Many of those employers are also centered in the knowledge creation and business services space, sectors that tend to use more office space. Moody’s Analytics Reis predicts the professional and business services sectors will grow by more than 20% over the next decade, a forecast that will bolster office demand.

Source: “Here’s Why Two Economists Think Clarity’s On The Horizon For Troubled Office Sector”