While commercial real estate has been dealt a debilitating blow because of the pandemic, there are glimmers of hope that a significant recovery may soon take hold. The Urban Land Institute’s Real Estate Economic Forecast, which was released Tuesday during ULI’s virtual 2020 fall conference, shows that the industrial and retail sectors are particular bright spots that are expected to rebound strongly over the next couple of years. A panel of experts at the virtual meetings sounded off on where they see commercial real estate heading.
Industrial is the “star” of commercial real estate. Total annual returns for the sector are projected to be 4.5% in 2020, 6.2% in 2021, and 10% in 2022, according to the ULI survey, which includes insights from more than 30 economists and analysts at the nation’s leading real estate organizations. The flourishing segment of e-commerce storage is expected to continue to surge, said Suzanne Mulvee, senior vice president of research and strategies at GID, a commercial developer and investor. “There’s a ton of room for growth,” she said. “Speed of delivery continues to be important for consumers. Storage will be a real tailwind for the industrial sector.”
Demand for “experiential” retail to continue. The declines retail is experiencing—annual growth is expected to be down 10% this year—aren’t entirely due to the pandemic, Mulvee said. “Retail was overdeveloped before the pandemic,” she said. “There were huge amounts of oversupply, and then the rise in e-commerce contributed to the issue.” The key to the future of retail, Mulvee added, is the redevelopment of current spaces and a focus on “smarter” stores. “Better retail will heal faster. Sales will get concentrated into the more attractive options.”
Mary Ludgin, senior managing director at investment firm Heitman, said “experiential” retail will rebound because consumers still crave the in-person shopping experience that e-commerce can’t provide. “Once there’s a vaccine,” she said, “you’ll see experiential retail boom.” The ULI survey forecasts that total annual returns for retail will be -4.0% in 2021 and 2.0% in 2022.
Multifamily prices mellow in urban centers. Douglas Poutasse, managing director at real estate investment firm BentallGreenOak, said he is “modestly optimistic” about the multifamily sector, a sentiment other panelists echoed. A drop in housing prices in expensive areas such as San Francisco and New York will fuel a recovery there, Ludgin said. “Big cities will recover and come back with better prices,” she said. “People still want what those places have to offer.” The total annual return rate for multifamily properties is predicted to be 0% in 2020, 4% in 2021, and 6% in 2022.
Offices may see an extended recovery. The ULI survey forecasts that the total annual rate of return for offices will grow from -2.0% in 2020 to 0.3% in 2021 and 4.3% in 2022. Ludgin predicted a full office recovery could take up to five years and said that, in the intervening years, some office space likely will be converted into hotels and apartments. Younger workers may want to return to the office for advancement opportunities, Mulvee said, and larger knowledge- and technology-based companies will drive the trend back to the office. Poutasse concurred that the office environment will continue to foster technology and innovation for many workers and spur on office demand in the next few years. “I think you will see people coming back to offices,” Poutasse said. “You don’t have the same productivity or innovation at home because you don’t have the same interaction.”