Predicting the future is a dubious business, especially when it comes to complex matters such as commerce, real estate, and finance. That being said, 2020 was a singularly uncommon year featuring many significant events with far-ranging implications—most notably the global COVID-19 pandemic. Consequently, there are certain mass reactions by investors and business owners that can be reasonably anticipated. Industry experts are coalescing around a handful of emergent trends that look increasingly likely to influence commercial real estate markets in 2021.
Recently, the Commercial Real Estate Exchange Inc. (CREXI) published their predictions for the coming year in the online edition of the trade periodical Commercial Observer. Here industry experts detailed the rise of so-called “18 Hour Cities” in the short term, the rebound of traditional metropolitan hubs in the longer term, and the inevitable resurgence in brick-and-mortar retail nationwide. These opinions have been bolstered by the work of other leading experts analyzing historical data and contrasting it with the most up-to-date economic numbers. The following is a concise breakdown of their findings according to real estate professional Jonathan Weiss.
The Rise of “18 Hour Cities”
Not long ago, the noted accounting firm and multinational professional services provider PricewaterhouseCoopers (PwC) published a report outlining emergent trends in real estate for the near future, featuring its annual list of the top ten US markets for the coming year. This year’s list is populated almost entirely by secondary markets such as Salt Lake City, Austin, Nashville, Tampa Bay/St. Petersburg, and Raleigh/Durham—all of which are considered to be “18 Hour Cities”. According to Weiss, they are labeled as such because they tend to have downtowns that thrive beyond the usual nine-to-five workday.
Noticeably, almost all of these cities are located in the sun-belt region. This trend is believed to be a direct reaction to the COVID-19 pandemic, as homebuyers and business owners relocate en masse to what they perceive to be safer locations. One of the primary factors influencing the current large-scale flight to the 18 Hour Cities of the sun-belt is comparatively smaller population densities. While these areas still retain the amenities of larger urban environments, they are not as vulnerable to viral transmissions. The full text of the PwC report can be read here.
The Rebound of Traditional Metropolitan Hubs
“The demand for commercial real estate in places like New York City, San Francisco, and Los Angeles should not be counted out in the longer term,” states Jonathan Weiss. In fact, as the various COVID-19 vaccines gain government approval and are administered to the general population, market forces dictate that the traditional metropolitan hubs will experience a resurgence in time.
Steven Pearlman, an economic columnist for the Washington Post, notes that “overall demand for office space could fall by as much as 20 percent.” He proceeds to explain that in past instances of demand falling so sharply, it has led to declines in rent of up to 50 percent. However, that’s only the first half of the supply and demand equation. Pearlman goes on to write, “once rents decline, a different dynamic will take hold.” The theory is this: once enough businesses flee to smaller cities or shutter their doors permanently, a vast swathe of desirable real estate will lay unoccupied.
Facing the grim reality of a zero return on their rental properties, the city’s real estate moguls will have no choice but to lower their asking prices. Once that happens, a brand new cohort of entrepreneurs—otherwise generally shut out from the downtowns of megacities—will sweep in, bursting with creativity, to grow businesses and generate new sources of revenue. Not long after, property values will begin to rise, and rents will slowly start to increase again. Though it may be a rough ride, the boom and bust cycle will prevail.
The Resurgence in Brick-and-Mortar Retail—With a Catch
There is a significant school of thought that believes a similar cycle of contraction and growth is what lies in store for the nation’s brick-and-mortar retail industry, as well. The general consensus is that, even with the COVID-19 pandemic reaching its apex, brick-and-mortar retail is not gone. With the arrival of a mass vaccination program, it will overcome consumer fear of the coronavirus and resurge—but with a catch. According to Brenda Richardson, an award-winning journalist for Forbes, “the next few years promise to be retail’s great transition period,” continuing “(t)op brands will take advantage of lower prices to upgrade their locations, while malls will leverage empty space to improve their tenant roster or convert to distribution centers for online retailers.”
A change in consumer behavior that was already underway in the years preceding the pandemic was thrown into overdrive with the onset of COVID-19. In the post-pandemic world, Wal-Mart, Target and other big box stores will likely bounce back without too much of a problem. Smaller retailers, however, will face more of a challenge. Main street will no longer have only the giant chains to contend with; it will also be forced to find a way to co-exist and thrive on the same playing field as Amazon and other newly-supercharged online retailers, as well. As with all other things in capitalism, though, small retailers that adapt to changing circumstances and evolve their business models will inevitably succeed. After all, there is no shortage of consumers who would prefer to patronize locally-owned, brick-and-mortar stores and do their shopping in person.
The Bottom Line
While it is, of course, impossible to see the future with total accuracy, one thing is eminently clear: the overall economy’s ability to recover in 2021 hinges on a successful response to the challenges posed by COVID-19. If all goes as planned, experts are in agreement that some specific overall trends are likely to pervade the commercial real estate market in 2021. Chief among them, the rise of 18 Hour Cities in the short term, the rebound of traditional metropolitan hubs in the longer term, and the inevitable resurgence of brick-and-mortar retail, albeit with a catch.
Jonathan Weiss is a real estate professional with a wide variety of interests. Originally born in New York City, his family transplanted themselves to Greenwich, Connecticut when Jonathan was only nine years old. His first passion in life was sports. After dabbling in a few others, Jonny Weiss ultimately settled on baseball, which became his primary focus throughout adolescence and early adulthood, and resulted in a slew of college baseball programs scouting him for recruitment. During freshman year, Jonathan Weiss played for Boston College, before transferring to Tulane for the next three years, and finally completing his college career at Cornell. Although he studied psychology at all these institutions, baseball remained his primary pursuit. Unfortunately, a game day injury leading to subsequent serious shoulder operations put an end to his dream of becoming a professional athlete.
After graduating from college, Jonathan Weiss experimented with a few career paths in order to figure out his raison d’être. After working briefly for a hedge fund, he shifted focus to the healthcare landscape and contemplated earning a medical degree. When that failed to capture his interest, he dabbled in the field of personal fitness, which was another non-starter. Finally, he tried his hand at real estate, fell in love with it, and has not since looked back. Jonny Weiss has been involved in the real estate business for more than five years now, excelling in various positions across multiple companies. He made the difficult decision to leave his last firm, Red Sky Capital, in order to pursue a master’s in Real Estate Finance and Investment from New York University, a degree which he obtained this past September.
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