While 2020 wasn’t the year anyone expected, better times are ahead according to the Urban Land Institute’s three-year economic forecast.
According to ULI’s economic forecast, which reflects the median consensus of 43 economists, GDP will decline on an annual basis by 5% for 2020, which, for context, is double the 2.5% decline in 2009. But forecasters anticipate GDP to rise 3.6% in 2021 as part of the recovery, and by 3.2% in 2022.
The consensus of the forecasters shows that employment will be slower to recover, with only about two-thirds of the job losses from the pandemic and economic shutdown recovered by the end of 2022.
“The CBRE forecast is a little more optimistic about 2021 than the ULI consensus, anticipating more upside from a new stimulus package that will likely come after the election,” said Jeanette Rice, Americas head of multifamily research for CBRE. “Employment will lag as it always does, so we expect it will be well into 2022 before we see a full employment recovery.”
Divergent impact on multifamily properties
The multifamily property sector has performed surprisingly better than anticipated, according to Rice. ULI’s forecast expects multifamily vacancy rates to be 5% in 2020, 5.1% in 2021 and 4.6% in 2022. The rental rate growth forecast from ULI shows that rents will decline 2.5% in 2020, rise 0.1% in 2021 and rise 2.5% in 2022.
While rent collections have been more of a challenge in Class C apartments than in Class A buildings, Rice said that vacancy rates are lower in Class C buildings and rent growth has been stronger in those buildings. She said that renters in Class B and C apartments know their future ability to rent is based on their rent history, so they’re using every means possible such as credit cards and borrowing from family to pay their rent. Some renters have been able to work out a payment plan with their landlords.
“Residents in Class C buildings are reluctant to leave and those apartments are backfilled more easily because they’re still in short supply,” said Rice. “Class A apartments have higher issues with vacancy rates because younger people who live in them are leaving to go live at home with their parents.”
Rice anticipates a recovery among Class A apartments by mid-2021. However, she pointed out that smaller properties are hurting more than buildings with 20 or more units that can more easily absorb the loss if one or two tenants cannot pay.
In addition to the uneven recovery by apartment class, Richard Kleinman, managing director for research strategy for LaSalle Investment Management, anticipates a faster recovery in markets that were hit hardest by the pandemic, such as Las Vegas and Orlando. He expects those markets to rebound quickly once people feel it is safe to travel again, while cities like New York and San Francisco will take longer because they will not have the growth capacity to rebound.
The migration pattern from the Northeast to the Midwest and South that was established before the pandemic will likely accelerate, said Tim Wang, managing director and head of investment research for Clarion Partners LLC. Cities in the Midwest and South have a lower cost of living, lower taxes and a better business environment, he said. The tax hit to cities like New York and Washington, D.C. because of the COVID-19 recession will likely result in tax increases in those cities, which will further hasten migration, Wang said.
Availability of capital
Investors have plenty of capital, Wang said, which bodes well for commercial real estate.
ULI’s economic forecast found that issuance of commercial mortgage-backed securities (CMBS), one source of financing for commercial real estate, has rebounded since a low in 2009, but to a much lower level than before the financial crisis levels (which peaked at $229 billion in 2007). The post-financial crisis peak was $98 billion in 2019. CMBS issuance is expected to fall by about half in 2020, with a forecast of $50 billion. Forecasts for 2021 and 2022 show CMBS growth to $60 billion and $83 billion, respectively.
Commercial real estate transaction volume reached $593 billion in 2019, also a post-financial crisis peak, according to ULI. Volume is expected to be about 50% lower in 2020 with a forecast of $300 billion. Forecasts for 2021 and 2022 show growth to $400 billion and $500 billion, respectively.
The National Council of Real Estate Investment Fiduciaries (NCREIF) forecast of total returns for apartments is 0% in 2020, 4% in 2021 and 6% in 2022.