Slow Rollout Of Vaccines Dashes Hopes For A Quick Recovery, But CRE May Be Past The Worst

Any hope for a quick recovery from the pandemic has been dashed by the slow rollout of the COVID-19 vaccines, experts now say.

A resurgence of the coronavirus this winter led officials in Illinois and multiple other states to reimpose last spring’s restrictions on much commercial activity and on gatherings of more than 10 people. Many businesses and commercial properties can’t freely operate until those restrictions are fully lifted, HVS Managing Director Stacey Nadolny said. That won’t happen until widely available vaccines largely eliminate new cases over a sustained period.

“It looks like that won’t be until at least the end of 2021,” Nadolny said.

But mass vaccinations will only mark the beginning of a recovery in the hospitality sector and the commercial real estate industry as a whole. Getting back to the relatively healthy conditions that prevailed at the start of 2020 will happen in stages, and landlords and tenants will have to spend the coming year remaking their spaces in ways that address lingering fears of disease.

“The first three quarters of this year, economically at least, will be much worse than people expect it to be,” CRG Senior Vice President and partner Geoffrey Kasselman said.

CRG, the real estate development arm of Chicago-based Clayco, works in several sectors, including multifamily and industrial. Kasselman said that even if a probable pair of victories by the Democratic candidates for Georgia’s U.S. Senate seats boosts the chances for further economic stimulus, it would take months for those dollars to make an impact.

He’s said he is also not confident the nation has seen the end of political turmoil, and coupled with a troubled vaccination program, that means commercial real estate will continue suffering.     

“The vaccine rollout is brutally slow, slower than people thought,” he said. “All of these things combined cannot possibly mean a robust economy in the short term, but the fourth quarter could be the bright spot of the year.”  

The hospitality sector has been hit particularly hard, decimated by the cancellation of all convention and group business as well as a steep drop in leisure travel. It now has several high hurdles to get over before a true recovery takes hold, Nadolny said. The conventions that help fill up many of Chicago’s roughly 48,000 hotel rooms each year won’t return until at least 2022. Other business travel, along with the tourist trade, will also stay slow if there are few places to shop and eat.

“Making people comfortable with traveling depends on getting vaccinations going, and it’s just not happening very fast,” Nadolny said.

Nadolny recently walked through downtown Chicago, and she said the change from a year ago was shocking.

“Only one out of five restaurants and retail outlets appear to still be open,” she said. “The government has to do something to help these spaces get occupied again.”

Leah Murphy, executive director and national practice leader of Cushman & Wakefield’s hospitality group, said it will take 12 to 18 months for hotel occupancy to recover. Leisure travelers will appear first, followed by convention-goers and other business and group travelers, but that won’t be enough.

“Occupancy absolutely will return and rebound, but what I wonder is, how well will RevPAR rebound?” she asked. “We need occupancy to recover before rate growth grows again.”

It will take another 12 months before hotel owners feel comfortable bringing rates back up to pre-pandemic levels, she added. That means a true recovery for the sector will take a total of two to three years.   

But the clock won’t start ticking on the recovery until vaccines are widely available, she added. When COVID-19 first appeared earlier last year, many thought it would be over quickly, and that countdown would begin shortly.

“The recovery window keeps getting pushed back,” Murphy said.

Hotel occupancy in Chicago’s Central Business District through November stood at 29.4%, she said, citing data from STR, a Tennessee-based company that collects hotel data. Over the same period in 2019, occupancy was 74%. The average daily rate for an occupied room declined from $204 to $132, and RevPAR plummeted from $151 to $39, a nearly 75% decline.

“You’d be hard-pressed to find any industry that has been this affected, unless it’s retail in the urban market,” she said. But 2020 could have been worse, Nadolny added, and the stage is at least set for a recovery, even if that process takes a lot of time. “We thought we would see many more hotels closed permanently.”

About 20 downtown hotels closed at some point during the pandemic, including the 1,281-room Sheraton Grand Chicago, the Park Hyatt Chicago and the 1,641-room Palmer House Hilton, which went into foreclosure this past summer when owner Thor Equities failed to make its loan payments to lender Wells Fargo.

Funding from 2020’s CARES Act allowed others to keep the doors open all year and operate at very low levels, Nadolny said, and some owners even felt confident enough to open new hotels in the fall.

Other major new projects, including the seven-story, 222-room Curio Collection by Hilton hotel on Navy Pier, plan to begin welcoming guests in the spring. St. Regis Hotels and Resorts’ recent decision to take over the 191-room hotel in the 101-story Vista Tower, which it plans to open in Q3 of this year, was another high-profile vote of confidence for the downtown market.  

“This is not a total doom-and-gloom situation, because hotels survived, and each one that closed has a reopening plan, except the Palmer House, but that will reopen as a hotel eventually,” Nadolny said.

While the Palmer House foreclosure proceedings are a worrisome development, Murphy said she also sees signs that lenders will work with hotel owners and help them survive the long recovery.

Sunstone Hotel Investors, an Irvine, California-based REIT with interests in 17 hotels, announced just before Christmas that it was able to secure amendments to the agreements governing its in-place unsecured debt facilities, and extend the waiver period from this summer to the end of Q1 next year, she pointed out, and that could set a tone for an industry still struggling to generate revenue.

“Lenders are going to have to come to terms with that,” Murphy said.

Even if hotels begin recovering this year, a lot of other dangers still lurk, even with a vaccine, Kasselman said. There’s been a lot of chatter about how the labor market has experienced a K-shaped recovery, with office workers continuing to work from home and earn high salaries, while millions of low-paid service workers lost their jobs. A similar dynamic is playing out in commercial real estate, with certain sectors like industrial, multifamily and data centers still humming along, while others like office, retail and hospitality saw demand nearly vanish.

“Industrial is going to keep soaring, but that’s not enough to keep an economy running,” he said.

Kasselman said he expects many lenders will reach the end of their patience as the economy remains in the doldrums as cold weather continues to smother business while government officials get vaccination programs up and running.

“I’d like to say something more positive, but there is a lot of hurt coming," he said. "Even a big infrastructure bill, which is what America needs desperately, would take three or four quarters before the funds would get into the economy.”

But the advent of vaccines has made at least some difference, even in the office sector, according to Michael Lirtzman, who just joined Colliers International as an executive vice president and principal. He now leads the firm’s downtown Chicago leasing practice.

“We’re past the trough in activity,” he said.  

Activity slowed to almost nothing for the first few months, but once companies heard about the vaccines, landlords and brokers started getting calls, Lirtzman added.

“I’d say in the last 30 to 40 days, tenants have started saying, ‘We’ve got to figure out how to get our people back to the office,’" Lirtzman said. "There is a lot of Zoom fatigue, and vaccines are going to take away a lot of the hesitation that people have about getting on public transportation.”  

But with so much uncertainty about how long it will take to vaccinate the working population, and how tenants will need to structure their offices to maintain health and safety standards, landlords will have to be prepared to offer flexible leases, Lirtzman said.

That leaves a lot of unknowns for 2021.

“There will certainly be a right-sizing that happens, but there are so few data points to look at and say, ‘This is where rents are going, and this is where concessions are going,” he said.

Lirtzman added that landlords will try hard to sustain rent levels, as many will now have to spend more on health and safety features such as advanced filtration systems and provide users enough space to socially distance.

“It’s going to be very expensive to run a building in Chicago,” he said. “Time will tell how long that takes and what it looks like, but there is more cause for optimism than I or so many others would have thought possible six months ago.”