“Navigating Real Estate Market Uncertainty in Unprecedented Times”

ULI Chicago members and guests gathered virtually for our annual forecast event featuring the ULI Emerging Trends in Real Estate 2021 report.  Our panel discussion titled “Navigating Real Estate Market Uncertainty in Unprecedented Times”, convened industry market executives Pamela Boneham, Managing Director, Head of Capital Strategies, Barings; Kim Adams, Managing Director, J.P. Morgan; Maggie Coleman, Managing Partner, Head of Private Capital, BFIN; and Denise Olsen, Senior Managing Director & Investment Committee Member, GEM Realty Capital.

If we traveled back in time to October 2019 and asked the panelists to predict what 2020 had in store, none of them would have foreseen a global pandemic, economic downturn, and social unrest. As we continue to navigate the unprecedented circumstances that embody 2020, the panelists reflected on where they came from, to where they are present-day, to where they are headed.

The emergence of the global COVID-19 pandemic in early 2020 abruptly shuttered restaurants, sent office workers home and shifted the economy. As our panelists compare the present economic downturn to the 2008 GFC, several factors make 2020 different from 2008:

• During the GFC, it took Congress 2 years to pass a stimulus bill; this year it took two days.
• The pandemic-induced crisis is more similar to the tech bust where changes in the economy are driven by changes in demand, not a credit crisis.
• Unlike “the great pause” of 2008, there is still a commitment to real estate.
• Most unique to 2020 is that transaction volumes across asset classes are moving in opposite directions; while investments in multi-family housing and industrial are growing, office, retail, and hotels are shrinking.

Looking back, what does this mean for where we are today to what the future holds?

First, there is the impact on office demand spurred by on-going work-from-home practices. Some sources speculate that a decrease in workers in the office, but a larger per-occupant area to allow for social distancing will keep demand relatively level with pre-COVID needs (ULI Emerging Trends in Real Estate 2021, pg. 7)  Overall, leasing is still driven by a long-term outlook on needs, forecasting for the next decade and the optimal environment for employees. The COVID-induced changes may not outlive the long-term planning considered at lease-signing.

Meanwhile, the absence of office workers is having a significant impact on urban centers. The panelists identified the strong connection between rental demands and office attendance. In the current 10-20% utilization of office space, multi-family housing rentals are on the decline. (In contrast, the single-family rental market is seeing notable growth.) But that does not mean that cities are on the decline for good. The panelists agreed that, as in facing past hardships, cities will rebound from this too. As employees return to jobs in the office, a swift return of the housing multi-family housing market is anticipated in tandem. The talent base, universities, and density of amenities that serve the urban lifestyle will sustain cities through this downturn, allowing for them to come out strongest.

The panelists agreed that steady and consistent growth in wages, jobs, and rents are still tied to tech and life sciences industries. As we have seen over the past seven months, businesses play an important part in the vibrancy of cities. Friendly tax policies play a role in where a company lands, bringing people and demand with them.  Any growth seen in specific geographies, will be because of those profitable companies.  So, while we see emerging markets that may be having a growth spurt, that does not predicate that they will overtake the traditionally strong markets.

So, what are the smart investments coming out of 2020 and the COVID-19 pandemic? The panelists point to growth in infill industry and single-family home rentals as growing asset classes and suggest considering what assets are currently the most distressed and will therefore have the potential for high returns. For example, as the travel industry is suffering from the pandemic, distressed prices for hotels present lucrative opportunities.

Another suggested approach for navigating uncertainty in the commercial office sector is to ask oneself what will the landlord need to provide for a palatable long-term lease? The panelists propose identifying the differentiators for assets that will meet future demand. After all, capital investments for tenant improvements can only make up for so much of an existing property’s features. What will tenants be looking for long-term? Maybe increased light and air, or a larger footprint to accommodate distancing. Identifying those factors can help to determine which assets to keep and which to cut loose.

The Webinar concluded by referring attendees to read more in the ULI Emerging Trends in Real Estate 2021.