While inflation concerns dominate the news at the moment, the big takeaway from a recent panel discussion about the state of commercial real estate sponsored by Reonomy was optimism about prospects for economic growth. Moderator Patrick Rafferty, vice president of product and engineering at Reonomy, and panelists Tim Savage, a professor at NYU Schack Institute of Real Estate, and Brian Bailey, subject matter expert for CRE at the Federal Reserve Bank of Atlanta, focused on the expected temporary nature of inflation as well as the impact of remote work on several sectors in commercial real estate.
“I hear the term ‘stagflation’ tossed around and I want to be clear that this current cycle is not stagflation,” says Savage. “A rough average GDP is about 3% and we’re anticipating annual GDP of 9% for 2021. The Fed provided needed liquidity during the pandemic and equity markets recovered quickly. If you look at CPI less food and energy, it’s about 2.5%. So, with growth of 5 to 10% and a CPI of 2.5%, we’re far away from the stagflation of the early 2000s.”
Bailey and Savage agree that the current period of inflation is “episodic” and driven primarily by supply chain issues and the reopening of the economy.
“We started seeing price inflation in energy and cars because of supply chain issues,” says Bailey. “Lodging rates rose starting in the summer of 2021 because personal travel returned aggressively.”
Property sector prognosis
While the industrial property sector was thriving before the pandemic because of the rise of ecommerce, there’s still room for growth because of the continued need for technologically sophisticated fulfillment centers, says Bailey.
For the multifamily sector, supply continues to be below demand, which allows for room to grow, Bailey says. There’s a lot of interest in repurposing underutilized assets such as B, C or D class malls and high-rise office buildings into residential use, particularly for workforce and attainable housing, he says.
Bailey cited several surveys that show that while 79% of workers were in the office five days per week in 2019, just 29% anticipate returning to an office full-time after the pandemic and 24% expect to be on site four days per week. Another 18% expect to be in the office less than one day per week, which will impact office, retail and hospitality properties.
“This is definitely a long-term concern for central business districts that depend on foot traffic,” says Savage. “Restaurants and retailers continue to operate at reduced capacity that started with Covid, was exacerbated by the labor shortage and now is impacted by the lack of office workers on site.”
Lagging labor force participation and CRE
Another concern for Savage and Bailey is declining participation in the workforce.
“This is the supply side problem of the labor market,” says Savage. “Labor participation was slowing climbing into 2019 but Covid-19 was a sharp demand shock to the U.S. economy. While participation is increasing over the low point of the pandemic, when labor participation dropped from 63% to 60%, the recovery has been mild and has yet to reach even 62% among prime age workers.”
The question is how many people will return to the workforce as the pandemic recovery continues. Bailey says analysts need to dissect the issue to understand the dynamics and potential impact on commercial real estate.
“We’ve seen upwards of four or five million people retire since the beginning of the pandemic, but we don’t know if that’s purely age or health issues or a lifestyle choice,” says Bailey. “It’s hard to know if these are permanent or temporary retirements.”
The second group that’s missing from the workforce, says Bailey, is about 1.5 to 2 million mothers who can’t find safe adequate childcare.
“On the demand side, we’re still missing more than one million jobs from the hospitality and retail industry,” Bailey says. “We’re still working our way through the long-term impact of people working remotely and that impacts small businesses in central business districts and employment for things like cleaning and supply services.”