Single family home prices in Floirda will drop and could take years to recover, but retail and office sectors could rebound by 2021. And the U.S. might look to Austria for model on how to reopen the economy. These were a few of the observations offered Monday by Spencer Levy, head of research for CBRE.
Levy offered a mostly optimistic report, projecting a swift and strong economic recovery, during the webinar hosted by the Urban Land Institute for Florida.
As bad as the Second Quarter results will be across all real estate sectors (except e-commerce distribution), Levy said CBRE economists fall into the camp predicting a “V-shaped” recovery, as compared to a “U-shaped” model with a more sustained recession.
“We are firmly in the V-camp, notwithstanding how bad the Second Quarter is going to be. We believe in a swift recovery," Levy said. The reason for this, he said, has been the speed and scale of the economic stimulus package approved by the federal government, which equates to 26% of the annual Gross Domestic Product.
The COVID-19 disease likely won’t be solved this year, but testing for the virus and antibodies can be accelerated, which will allow some segments of the economy to reopen. Levy predicted the U.S. might follow the Austrian model for reopening retail businesses using a phased approach once the pandemic begins to subside. That model allows for the opening of small retail shops first, followed by the reopening of larger stores and businesses. Restaurants would reopen last, and would likely open with limited capacity, he said.
“In Hong Kong, there are people lined up to get into restaurants and luxury retail stores,” he said, predicting a similar surge in demand once U.S. businesses reopen. But a large percentage of restaurants, perhaps as much as one in five, may never reopen.
Conventions and business travel will likely take at least a year to return to normal. But pent-up demand for vacations will fuel a recovery this summer for hotels and cruise industries, which can adjust their pricing to attract leisure travelers.
“I don’t want to candy-coat the short term. It’s awful,” he said. “The good news it will start to improve in the Third and Fourth quarter. People will get back on cruise shapes and come back to Miami, because vacations are awesome – and cheap vacations are even more awesome.”
While the short-term impacts of coronavirus are clear, Levy said the the pandemic will permanently alter real estate development across several sectors, most notably new office development. Levy does not expect the work-from-home culture to last beyond the mandated quarantine. In fact, just the opposite.
“People are better when they go to the office in terms of their productivity, their happiness, attracting and retaining talent," he said.
Levy expects the office sector to shift to a more fluid workplace, where people still maintain office space but also work remotely. The secular change, however, may be a reversal of the high-density office designs in favor of model where the employees have more square footage and personal space. He also expects office developers to respond to an increased demand for new post-COVID technology with an emphasis on healthy buildings, particularly advanced HVAC systems.
In the multifamily sector, CBRE noted that fewer sales are closing and most sellers have pulled their offerings from the market. Initial reports of plunging rent collections this month turned out to be premature, as the firm noted collections to date are above 80% for the month.
“There was really no area where there was an under-performance. But most people in the business believe May will be a bigger harbinger than April was,” Levy said.
The firm predicts multifamily operators will see an increase in vacancies in the short-term, but will start to see a rebound in the Fourth Quarter. Rents also will decline this year and likely won’t bounce back until 2021.
One asset class that has been especially hard hit by the pandemic has been senior housing, which includes assisted living and skilled nursing card. The hit has been two-fold, Levy said. First, senior citizens have proven to the be most vulnerable to the disease. But also, the leasing and sales of senior facilities are frozen because most facilities are lockdown mode.
A third factor will contribute to poor performance for senior housing: the anticipated price drop for single family homes. “That will be a larger threat to senior housing because people move into senior housing because they have equity built up in their homes,” Levy said.