Contact Us

Analysts Weigh In On What CRE Can Expect For Each Asset Class In Q4

Most years, we are not ready to say goodbye to summer, but this year things are different. There is the economy, there is the election, there are kids and other loved ones at home, there are restrictions on what we can and cannot do, there is Zoom and there is a global pandemic.

And save one or two silver linings, none of it has been too kind to commercial real estate. No one knows when it will all end or get back to normal, but one thing that is normal is today — the day most of the business world says goodbye to summer and begins the mad dash to the end of the year.


You would never know it, but much has happened in 2020. If you're suffering from pandemic haze and have lost track of where things stand in the industry, or even what day it is, Bisnow has you covered: We broke down all of the major commercial property asset classes to help you get up to speed — where the sectors have been since the beginning of the year, where they are now and what expert analysts think will happen as we march toward 2021.



What has happened from Jan. 1 to Aug. 31?

Industrial was one of the first property types to feel the effects of the coronavirus pandemic, as the disruption of China’s manufacturing industry increased and rippled across the global supply chain. When the flow of goods into the U.S. slowed, leasing and sales activity largely came to a halt during March, April and May. As U.S.-based companies recalibrated their supply chains, the sector began to see exponential growth in demand for industrial properties, driven by e-commerce, grocery and logistics.

Where are we now? 

The U.S. industrial market is one of the strongest-performing asset types right now because of strong consumer demand for e-commerce products and services. The strength of occupancy gains during June, July and August may be offset by a large volume of new product expected to deliver across several markets in 2020, which could lead to a short-term elevated national vacancy rate by the end of the year, according to Transwestern.

Analyst Outlook:

CoStar Advisory Services Senior Consultant Juan Arias said that the industrial sector should continue to perform well relative to other asset types, but economic uncertainty could still potentially destabilize the market. 

“The uncertainty is, if this economic downturn continues for a bit longer, does it trickle into the higher-income households and online? And if those [people] start losing jobs, then what happens to e-commerce demand?” Arias said.

The challenge of reconfiguring U.S. supply chains to combat future disruptions will also have a significant impact on the industry. Some companies may choose to re-shore their operations, while others may continue to move away from “just in time” retail, Deloitte Vice Chairman and U.S. Real Estate Leader Jim Berry said.

“Industrial will have to be square in the middle of that kind of solution. Longer-term storage, mixed with that shorter-term, near-time solution, that last-mile,” Berry said.


What has happened from Jan. 1 to Aug. 31?

What began as a lackluster year for the office sector got markedly worse when the coronavirus pandemic forced workers out of the office: About 42% of the U.S. labor force worked from home in May, according to a study from Stanford University.

A sharp decline in absorption marked Q1, although net absorption overall remained positive, according to Colliers International’s Q1 2020 Office Market Outlook Report.

“The market experienced a very challenging Q2: There was 14M SF of negative net absorption, and leasing velocity in Q3 has remained significantly depressed,” JLL Senior Vice President and Director of U.S. Office Research Scott Homa told Bisnow.

Where are we now?

A slow return to the office has begun, but publicly traded office REITs on an unlevered basis are down about 20%, Green Street Advisors Senior Office Analyst Danny Ismail told Bisnow. Overall, REITs’ unlevered return is down about 11%.

The main concern is the longevity of remote work. While office owners and landlords have resorted to guilt trips and other tactics to get tenants back to the office, more and more businesses are claiming remote work is here to stay

Landlords have largely kept face rents relatively flat, but Homa said tenant improvement allowances and other concessions have grown, and face rents are starting to come down to the tune of about 3% to 5%. Homa said an average of about 500K SF of sublease space is hitting the market per week.

Analyst Outlook:

“It’s pretty obvious that things are going to be challenging for the office market over the interim, but there’s certainly a scenario in which ‘de-densification’ and space redesign offset a lot of the potential contraction due to other issues,” Homa said. 

Office workers ultimately will return to their traditional workplaces, but in what quantity and exactly how that affects the market remains to be seen.

“Right now, about 3% of office workers work remotely on a permanent basis, and we think that goes up to 10%,” Ismail said.

Ismail also predicts greater flexibility, with more people working remotely one or two days a week, for instance.

“For the overall sector, net office demand will likely be 10% to 15% lower even when we come out of this recession because of that increase in remote working,” he said.


What has happened from Jan. 1 to Aug. 31?

The pandemic devastated the hotel industry as tourism ground to a halt during the depths of the crisis. Demand slowly recovered for most of the summer, but new data from late August shows concerning signs for hotel owners. 

Hotel demand bottomed out the week of April 11, when revenue per available room, or RevPAR, the industry’s key performance metric, was down 83.6% year-over-year, according to hotel research firm STR. Demand then gradually increased for the next four months, but that growth stopped in mid-August. 

The week ending Aug. 22 was the first week since April 11 when U.S. hotel demand decreased from the prior week, according to STR, with week-over-week demand falling 2.7%. That trend continued during the week ending Aug. 29, with demand falling by 1.3%, according to new STR data shared with Bisnow

Where are we now?

Hotel demand began to slow down in mid-August, and experts believe it could continue to fall in September and October as fewer people take vacations. A key demand segment to watch is corporate travel, with hotel owners hoping companies will begin sending people on more business trips after Labor Day. But big group conventions and international tourism still remain largely nonexistent, and the industry will not be able to fully recover until those travel activities return to normal. 

The performance of hotels has varied based on the segment of the market in which they operate. Large downtown hotels with ballrooms have performed the worst, while limited-service hotels around driving destinations such as beaches or national parks have performed better, as have extended-stay hotels.

Hotel owners have been forced to cut costs as much as possible to keep their properties operating with a fraction of their typical demand, but many are having trouble paying back their debt. Roughly 23.4% of hotel loans tied to U.S. commercial mortgage-backed securities were delinquent in July, according to Trepp — far outpacing the delinquency level during the 2008 Great Recession. 

The length of the pandemic and the availability of a vaccine could determine the trajectory of the industry’s recovery and whether some struggling hotels are able to survive. 

Analyst Outlook:

“We’re looking at the end of summer,” STR Senior Vice President of Lodging Insights Jan Freitag said. “So people were home for 100 days and said, ‘I need to get away,’ they went away, and now they’re like, ‘OK, that was our summer vacation. Let’s go home.’” 

“I think we’re going to see ownership changes for sure where some owner is saying, ‘I can’t make this work. I can’t make my debt service.’ A bank steps in and there will be another owner,” Freitag said. “Some properties that are open right now will probably figure out how to run in a 30-40% occupancy environment with limited service. The big-boxes are the big question. Without group demand and tepid transient demand, will owners be able to continue to function?”



What has happened from Jan. 1 to Aug. 31?

The U.S. retail space limped into 2020 with shopping malls and major retailers already facing a financial pinch from the growth of e-commerce and a challenging retail sector. What was already a shaky sector turned tumultuous in mid-March when the global coronavirus pandemic forced U.S. retailers to shutter their doors for months at a time. These actions pushed brick-and-mortar retail income levels to zero. Early on, the National Retail Federation warned the sector faced a 20% drop in retail sales during just the first three months of the pandemic, with retailers losing an estimated $429B in direct and indirect sales and 1.7 million U.S. retail jobs. 

The loss of foot traffic and an onslaught of retail bankruptcies raised fears that commercial landlords would suddenly end up with empty retail spaces across the U.S. Bankruptcy filings from major brand names like JCPenney & Co., Stein Mart and Pier 1 Imports furthered these fears, with S&P Global Market Intelligence data placing the total number of US retail bankruptcy filings at 44 through mid-August. 

Where are we now? 

Retail remains in flux with sales rising modestly in July, according to S&P Global Market Intelligence. While grocery stores and non-discretionary retailers remain on more solid footing, stores specializing in discretionary items are still dealing with frightened consumers, fears over shopping in public and economic strife, which generally cuts into discretionary spending first. 

Analyst Outlook: 

Analysts with Coresight Research now forecast between 20,000 and 25,000 U.S. retail closures this year, an estimate that is much higher than the original 15,000 closures forecast. While retail is expected to remain in a state of uncertainty, data firm Reonomy sees the market already repurposing former retail spaces, a trend that is likely to continue into 2021 as distressed retailers shut down, leaving empty spaces available for alternative uses. 


What has happened from Jan. 1 to Aug. 31?

The multifamily sector has weathered tens of millions of Americans losing their jobs better than many sectors, experts say, but it hasn’t been a walk in the park and likely won’t be for at least the rest of the year.

Along with a modest uptick in vacancy rate from 4.3% to 4.6% and a 13 basis point rise in cap rates, the multifamily sector saw a net absorption of 21,100 units in Q2, according to a CBRE quarterly multifamily report. Rent collections, too, haven’t plummeted for the sector as a whole, with 92.1% of apartment households making full or partial rent by Aug. 27, according to the National Multifamily Housing Council. The federal government’s $2 trillion stimulus package supplying many households an extra $600 per week in unemployment benefits allowed many to keep up with rent payments.

Where are we now?

Some of that steadiness relied on factors that can’t be counted on the rest of the year. For one, Q2 typically sees 60% of total net absorption in a given year, according to CBRE Head of Multifamily Research Jeanette Rice. Also, the federal unemployment benefits of $600 per week have been halved.

“We’re expecting vacancy to move up this quarter a lot more than last quarter,” Rice said.

A lot of that could happen in Class-B and Class-C properties, according to Morningstar Equity Analyst Kevin Brown, who focuses on apartment REITs and, like Rice, has found the sector surprisingly resilient thus far. Class-C properties have a sub-4% vacancy rate but tend to be occupied by lower-income renters most hurt by the pandemic.

Gateway markets like the San Francisco Bay Area have seen rough patches, but suburban and Midwestern markets have actually seen rent growth, Rice said.

What stands to affect all markets and “may be the story of the day,” Rice said, is the nationwide residential eviction moratorium issued by the Centers for Disease Control and Prevention that will stay in effect until 2021. It replaces a previous order that expired in July and is meant to address the 30 million to 40 million Americans the Aspen Institute has said are at risk of eviction. But some association groups, landlords and property owners are expected to challenge its legality.

Analysts Outlook:

“To date, things have been better than I had initially feared,” Morningstar Equity Analyst Kevin Brown said. “With occupancy, we’ve seen declines over the past four or five months, but it hasn’t been too bad.”

“Whereas occupancy should remain high on Class-A, Class-B probably will see pretty significant drops in occupancy, and it will be harder for them to fill back up until the economy is fully back going strong,” Brown said. “Class-C is probably going to see really large drops really quickly. 



What has happened from Jan. 1 to Aug. 31? 

As the industry entered 2020, labor was the primary issue for restaurants: finding it, retaining it and keeping costs down. The National Restaurant Association projected that restaurant sales would reach $889B this year, a 4% growth rate over 2019. The pandemic has turned all of that on its head. Numerous shelter-in-place orders and consumer fear have seen restaurant business plummet. Many governments even prevented restaurants from serving diners indoors, forcing them to rely on takeout orders. Those that can open with indoor dining are required to enforce social distancing protocols, which limit the number of patrons a restaurant can serve.

Where are we now?  

The restaurant industry has been recovering in fits and starts. While millions of laid off or furloughed restaurant workers have been rehired nationwide, millions more are still unemployed. And while some areas of the U.S. have seen a strong return of diners, that enthusiasm to eat or order takeout has been uneven among restaurateurs surveyed in the National Restaurant Association’s September report. With indoor dining still banned in many parts of the country, questions remain as to how restaurants will survive through the winter months.

In August, eateries only added 133,600 jobs, NRA reported, with 26% of full-service restaurateurs reporting that they planned to add to their staff in the next 30 days. At the same time, 25% are predicting they will need to lay off or furlough staff during that period.

Many restaurants are throwing in the towel: Yelp found that nearly 16,000 restaurants that closed temporarily during the pandemic have closed for good as of July.

Analyst Outlook: 

The restaurant business is founded in chaos, said Clark Wolf, founder of New York-based Clark Wolf Co., one of the nation's leading restaurant consultants. 

“Anybody who thinks that the restaurant industry runs smoothly has never been in it,” Wolf said. “It's a series of recoveries from disasters.”

Problems are likely to mount for the industry as the winter months approach. Where some restaurants were able to augment dining-in with patio and outdoor seating, that will become less possible as temperatures drop. Aaron Allen & Associates, a restaurant consulting firm, predicted that 231,000 of the 660,000 eateries across the country will likely permanently shutter this year. 

“We're not halfway to anywhere,” Wolf said. “How can we possibly think about any stabilized recovery until the weather gets better next spring? We really can't.”

Data Centers

What has happened from Jan. 1 to Aug. 31? 

As property types go, data centers have had a relatively busy run since the beginning of 2020, as the industry has responded to massive shifts in the way people connect to each other. People working from home and students attending virtual classes meant upticks in demand in most major markets as data usage rises. Online retailers and on-demand entertainment venues are examples of operations benefiting from the pandemic, while at the same time using much more data capacity to deliver their various products to consumers who are spending much more time at home.

During the first half of 2020, total U.S. inventory in major markets, including Northern Virginia, DFW, Silicon Valley, Chicago, Phoenix, greater New York and Atlanta, grew by about 13% compared with the same period in 2019, according to CBRE Research.

Much of that new space was being occupied, with vacancy down an average of about 168 basis points in the seven major markets. Only Northern Virginia, which saw massive inventory growth over the year, experienced a rise in vacancy, of 60 basis points.

With demand for cloud computing remaining high, REIT share prices in the sector are up 31.8% year-to-date compared to the REIT average of a drop of nearly 11%, according to a NAREIT report

Where are we now?

Despite any short-term bumps the pandemic slowdown has caused in the operation of data centers, the outlook for the next few years remains solid in the global market. The market is being driven by cloud adoption and a heightened demand for co-location facilities that started before the pandemic.

Analyst Outlook

“The dramatic increase in remote working has reinforced the importance of data centers and the networks that support them, and we expect this trend to continue,” CBRE First Vice President William Hassan said

On the whole, data centers have been able to keep up with the spike in demand, some of which may be permanent as more people spend more hours working at home, even after the pandemic. Increased demand for data centers will, in the years ahead, continue to spur development of the properties, especially in places that are already major markets.

Healthcare Real Estate


What has happened from Jan. 1 to Aug. 31? 

The pandemic overwhelmed New York’s hospital system in April spurring hospitals nationwide to line up makeshift overflow space, only to find that most hospital systems actually could absorb the rush. Telehealth visits spiked as elective medical procedures were put on hold, but the majority of medical practices were allowed to remain open as essential businesses. Landlords of medical office buildings and retail healthcare outposts reported few disruptions in rent payments, according to JLL research.

Where are we now? 

Gone is the optimism that the coronavirus would only be a brief concern. The pause in elective surgeries, combined with low-income communities being impacted disproportionately, ate into healthcare systems' finances this summer. Making matters worse, healthcare systems don’t have enough data on the pandemic’s long-term impact on health or the economy — so they can only lay out capital plans a few months at a time. 

Telehealth has receded to account for only about 7% of doctor visits nationwide, JLL data suggests, but the entire country has a comfort level with the practice that could have taken years to reach otherwise. The scientific community continues to gain an understanding of the coronavirus, but if early indicators of potential long-term effects hold true, this could be the birth of a whole new specialization that might require its own clinical space. 

Analyst Outlook: 

“The pandemic pushed telehealth five years into the future, much like it has for working from home, but it has still only been six months, and healthcare administration is a huge battleship that needs to be turned around slowly,” JLL Director of Healthcare and Life Sciences Research Audrey Symes said. “It’s still too early to tell the long-term impact, [but] provision of medical care looks like it will revert more to what it was [pre-pandemic] than what might have been initially thought.” 


What has happened from Jan. 1 to Aug. 31? 

After a year of overall construction stagnation in 2019, the industry started off strong in 2020. In January and February, construction spending grew around 8.2% year-over-year, according to the U.S. Census Bureau. In March, construction spending grew 4.7% year-over-year. But, when the coronavirus touched down in the U.S., confidence in the industry declined rapidly, a Deloitte 2020 midyear construction and engineering outlook report shows.

Major U.S. cities — such as Boston, New York City and San Francisco — paused construction in an attempt to mitigate the spread. By May, year-over-year construction spending rates shrunk to only a 0.3% increase and in June and July, there was only a 0.1% year-over-year increase in construction spending, the Census Bureau shows. This data is not yet available for August. 

Meanwhile, unemployment across the industry skyrocketed from 5.4% in January to 16.6% in April, according to the Bureau of Labor Statistics.

Where are we now?

Construction has faced a series of hurdles: a labor shortage amid the crisis as well as disruptions to the supply chain, the Deloitte report shows. In major cities, construction has stagnated, while unemployment in the industry has steadily declined since its peak in April, reaching 8.9% in July, according to the Bureau of Labor Statistics. It is still over 3% what it was at the start of the year and over 5% year-over-year.

Analyst Outlook: 

Deloitte anticipates that overall growth of the industry will be affected in 2020 as a result of the pandemic, but that there are areas for recovery. 

“Despite the grim outlook, E&C firms are poised to take advantage of bright spots emerging for the industry that could facilitate recovery in the remaining months of 2020,” the Deloitte report states. “Infrastructure and public utility projects have maintained their momentum to some extent relative to private construction, and once local economic activity picks up, residential housing starts are expected to gradually rebound.” 

One route toward recovery could be through modular construction and prefabrication, the report states.

Capital Markets

What has happened from Jan. 1 to Aug. 31? 

Before most people were familiar with the coronavirus, investors were hungry for commercial real estate in the U.S. Capital was plentiful, both from domestic sources and international investors, with Deloitte's 2020 Commercial Real Estate Outlook report, which surveyed 750 C-suite executives in commercial real estate during 2019, projecting that capital amounts would increase over 2020. Investors viewed the office sector at that time as the most favorable, the report found. 

The coronavirus has changed those estimates dramatically. Investment sales totals in the U.S. dropped by nearly 70% to $40.2B in the second quarter, compared to the same period last year. Hotels were the hardest hit, seeing a 91% drop in investment activity as travel came to a virtual standstill during the height of the pandemic's shelter-in-place orders. Other investment activity followed suit. 

Where are we now? 

Buyers and sellers are also largely separated by a valuation gulf, with sellers hoping to achieve better pricing than investors are willing to risk in the current economy, according to a JLL report. That’s especially true with private investors, who remain active in the markets, but are seeking distressed assets,” JLL Capital Markets Head of Research Sean Coghlan said in a report.

“A bid-ask spread is evident in the markets, and price discovery remains underway,” Coghlan said.

The only bright spots were industrial real estate, which has become the belle of the ball among investors as the pandemic accelerated online shopping trends, and multifamily, which has seen renewed strength after an initial chill. Asset prices of both industrial and multifamily actually increased 7% this year over last, CBRE reported.

Analyst Outlook: 

Investors will continue to favor industrial and multifamily assets throughout the year, experts say. But some alternative real estate assets are gaining favor from investors, including data centers, cold-storage and self-storage facilities, according to CBRE.

Investor dollars are still plentiful, with capital projected to reach $328B across the globe, according to CBRE. But investors may be split between buying in secondary markets that have seen a reopening of the economy sooner than major cities, or institutional investors focusing on core assets with strong rents in place, the report said.

While overall investment sales volume will drop 38% this year, CBRE is predicting a strong rebound in 2021 by 50%, as buyers become more willing to lower prices to attract sales.

“Owners who are unwilling to sell at discounts will have to extend holding by a few years,” CBRE officials said in the report.