Overall sentiment across the commercial real estate market is increasing as 2020 becomes a bad memory, with confidence sharply rebounding from historic lows recorded in the middle part of last year. The latest RCLCO Current Real Estate Market Sentiment Index has increased 22.4 points over the past six months, with respondents predicting that conditions will improve “significantly” over the next 12 months.
Concern about the state of the economy and CRE markets was previously measured at 9.2, its lowest level measured since RCLCO began recording the index at the end of the Great Recession. Yet confidence began increasing once vaccines began rolling out in the fall of 2020 and a possible end to the COVID-19 pandemic seemed within grasp, with the RMI index increasing to 31.6, a recession-level benchmark.
Approximately 61% of survey respondents believe real estate conditions will be moderately or significantly better in the next 12 months, though there’s no clear consensus on the impact the Biden administration may have on markets. Respondents also indicated that most product types have moved from contractionary to expansionary phases since the last survey, with the exception of retail, office, and hospitality – all of which are expected to remain at the bottom of the cycle for at least the next year.
Nearly all respondents (90%) believe teleworking is here to stay and will continue to impact household and office decisions. This aligns with a recent Pew Research Center study that found that 71% of employed Americans with WFH-friendly jobs would continue to work at home, if given the choice.
The permanence of this trend – at least partially – could lead to disrupted migration patterns as offices and households move to suburbs and transit-rich locations lose their appeal. Recent CBRE research also bolsters this theory, noting that the continuing impacts of COVID-19 will be central to any near-term corporate location strategy as a “sea change” in national demographics forces HR departments to reimagine remote work. Homebuyers from pricey regions like San Francisco and New York City are increasingly abandoning dense urban cores for secondary markets or the suburbs, which is driving up both home prices in those areas and keeping more people in apartments.
Current RCLCO modeling for the US economy resembles the “swoosh” shaped recovery the firm first identified as the likely trajectory in the second quarter of 2020. A robust recovery began in the third quarter as states began reopening, but a second wave of COVID-19 infections stalled labor market recovery in November and December. The RCLCO baseline scenario assumes sufficient vaccine adoption, if not herd immunity, will occur by the end of the third quarter or beginning of Q4 2021, allowing the country to return to something at least resembling a “new normal.” Under this scenario, unemployment would decline to an equilibrium rate of 4-5%.
The firm offers one caveat to this approach, however, in recognition of the fact that there are two economies at play in the U.S.: white-collar, high-wage, “work from anywhere” workers (who are experiencing little if any stress) and lower-wage essential and service workers (who are under considerable distress). Because of this disparity, a K-shaped recovery is likely more realistic.
Given the uncertainty around full rollout and adoption of the vaccines, and possible mutations of the virus that could change the perception or reality of herd immunity, there is a possibility that the stalling of the recovery experienced in the latter half of Q4 2020 could extend, or even further erode, the recovery,” the report notes. “In this Downside case, the economy would not reach pre-COVID levels of activity until Q2 2022, or beyond.”