The ever-optimistic commercial real estate industry was hoping for the best and preparing for the worst at the end of a difficult 2020, with incoming coronavirus vaccines prompting hope for a rebound.
Experts assumed big changes for 2021 in response to the pandemic’s wide-ranging impact and actually nailed a lot of their predictions: Developers spending on well-amenitized multifamily assets were rewarded; office landlords rushed to upgrade their buildings’ health and sustainability bona fides; construction starts came back to life, albeit briefly; and niche development trends like office repositionings grew.
Yet the Covid-19 crisis continued to throw some major curveballs at the industry — the delta variant postponed the great post-Labor Day office return into 2022 and a pandemic-related shipping backlog created a global supply chain crisis that caused ripple effects across every asset class.
Industry experts missed on only a few of their 2021 predictions, although much of their failure to deliver stems from coronavirus cases rising and falling through the year, forcing intermittent restrictions. Bisnow took a look at which trends didn’t materialize, plus a few that caught the industry by surprise.
Whiff No. 1: A Wave Of Distressed Hotel Assets Will Hit Market In 2021
Hotels were among commercial real estate’s largest losers in 2020, with consumers postponing travel plans indefinitely. Lenders kept hotel owners afloat with forbearance in the pandemic’s early months in 2020, but began to grow impatient earlier this year.
By fall, it was clear a massive wave of distressed hotel assets wouldn’t hit the market. Big hotel players have spent billions on distressed assets since the onset of the pandemic, but investor capital was largely spent elsewhere.
“Hotels weren’t saved by returning travelers, but rather the continued accommodation by lenders and governments easing travel restrictions,” JLL Global CEO of Hotels and Hospitality Gilda Perez-Alvarado said. “I think it was a bit of a marketwide miscalculation. It usually takes time for the distress to materialize, it takes two to four years. We had never seen such a quick, precipitous downward trajectory as we saw now, maybe we didn’t have to wait two, three, four years.”
Lenders didn’t want to assume assets that in some cases were shut down for more than a year, she said, and are just beginning to assess the future of each asset as travel trickles back. More distressed assets will begin to hit the market in 2022 as the industry gains more clarity and the pent-up dry powder of capital finally begins to move.
“The market is never static,” Perez-Alvarado said. “It moves. We’re like at the conveyor belt at the airport. You can stand, but it’s still moving.”
Whiff No. 2: Retail Will Double Down On Contact-Free Interactions
Retailers kept buy online, pickup in-store offerings and explored contactless checkout, but their spread was slightly overstated. The ubiquitous Amazon storage lockers can be found across major metros and inside stores like e-commerce giant-owned Whole Foods. But the lockers for buy online, pickup in-store transactions didn’t sprout at many other retailers and contactless checkout didn’t take over. Retailers, in many cases, kept Plexiglas barriers at cash registers up and it was business as usual.
“It’s happening very slowly, much slower than I anticipated, but that’s on the horizon,” Time Equities Director of National Retail Ami Ziff said of contactless checkout. “That trend has not been rolled out as expeditiously.”
Retail made a surprising rebound in 2021, with more physical stores opening than closing for the first time since 2017 as consumers sought value when the market was down. This holiday season is expected to blow past expectations. Not all of the comeback is being driven by traditional brick-and-mortar stores; omnichannel retail locations, or physical retail acting as its own distribution center, has risen. Among the omnichannel presence are “dark stores,” or locations that only fulfill online orders.
“We’ve seen very significant demand from folks like GoPuff, who are looking to open dark stores,” Ziff said. “They are a good space filler. They don’t necessarily drive traffic to the shopping center; as long as they’re not your anchor tenant, they pay good healthy rent, they’re absorbing space, and that’s a net positive for the industry.”
Inconclusive: Flex Office Will Thrive When Covid-19 Subsides And Economy Adjusts
Many office users committed to flex offices in 2021, but the true impact of this prediction wasn’t felt with the pandemic and its two variants, delta and omicron, delaying many office returns into 2022.
Office markets rebounded somewhat this past year as tenants slowly returned to urban cores and leasing activity persisted, despite physical occupancy figures that remain well below pre-pandemic levels, according to Avison Young research. Flex office assets were in demand — when the coronavirus didn’t get in the way.
“Will tenants continue to want flex space? Yes,” Nadir Settles, Nuveen managing director and New York regional head of office and the Americas, told Bisnow. “It didn’t materialize in the way people thought, but that was a dynamic based on vaccination mandates.”
Experts predicted the hub-and-spoke model would rise in popularity, and their hunch was correct: Flex office operators crept into suburban spaces, following the flock of remote workers in search of cheaper spaces to live, work and play.
“I don’t think it’s inconclusive,” Settles said of the prediction. “I think you’ve seen spots of it. I think it’ll be a continued part of occupying buildings.”
Surprise No. 1: Exploding Multifamily Rents
Apartment rents rose from their pandemic slumber in the spring and erupted over the summer. By fall, they’d recovered and surpassed 2020 levels in most of the nation’s major metros. Today, U.S. median apartment rents are 17.8% higher than at the beginning of the year, according to the latest Apartment List National Rent Report.
Experts said some of the growth is simply making up for 2020’s losses, but few could predict the double-digit rises in 2021. CBRE claims it was the only brokerage predicting the dramatic multifamily recovery, projecting 10.9% rent growth in 2022, a figure that arrived a year early, CBRE Research Director and Senior Economist Matt Vance said. The growth stems from a nationwide lack of homeownership opportunities, near-term economic growth and job creation fueling demand.
“We also correctly expected expensive coastal markets would lag this strong recovery,” Vance said in a statement. “Adding to this on the coasts is the fact that these markets were most negatively affected during the pandemic, and so there is more to recover from — resulting in much higher than average rent growth in the near-term.”
Surprise No. 2: Office-To-Everything Conversions
Experts predicted some office repositionings into warehouses and multifamily properties. But developers ran wild in 2021, with tens of millions of SF in office conversions, finding the conversion process faster than permitting and building at increasingly scarce greenfield sites.
More than 20% of the lab spaces under construction in the six-largest U.S. life sciences markets are office-to-lab conversions, as developers capitalize on a lack of space and sky-high rents. Boston alone counts more than 8M SF of repositionings. More than 10M SF of office-to-industrial conversions are underway in six of the nation’s largest metro areas in response to an all-time low nationwide industrial vacancy rate of 4.6% in Q3, according to a December Newmark report.
“Though still in its infancy, we expect this trend to continue to gain traction in coming quarters due to a continuance of exceptionally strong industrial market fundamentals,” Newmark Director of Research in Boston Elizabeth Berthelette said of office-to-industrial plays in a statement. “The success of recently completed office-to-industrial conversions in Boston will attract more capital to these types of projects.”
Surprise No. 3: The Global Supply Chain Crisis
The Ever Given cargo ship in March blocked Egypt’s Suez Canal for days, causing hundreds of millions of dollars in losses to the global trade market. The snafu put the spotlight on an already-simmering supply chain problem that today remains a massive logistics headache.
“Demand for goods shot up once people began to work from home, and a stop-and-start global supply chain hasn’t been able to keep up since,” said Lisa Williams, a longtime supply chain expert and CEO of World of EPI, a toy company that makes dolls.
Williams felt the supply chain’s gut-punch firsthand, with supplies stuck on container ships for months at a time.
“We knew that if we tried to stockpile products to make sure we were safeguarded, that was going to result in shortages of warehouse space,” Williams said. “We’re seeing the price of warehouse space skyrocketing.”
Industrial users looking to renew their rents this year face an average rent hike of 25% nationwide, according to CBRE. Tenants have leased a record 826M SF of warehouse space through October as they increasingly seek to onshore inventory and production.
“Those are prices we have to pass on to our retailers,” Williams said. “We do try to absorb some of it because we’re cognizant of our consumer and I want to make the prices palatable, but unfortunately we have to pass along 20%, 25%, 30% cost increases.”