CRE Executives Make Their 2021 Predictions For The Industry

WHAT DID THEY SAY

As the commercial real estate industry finally puts 2020 in the rearview mirror, the path forward in 2021 is far from certain — and largely dependent on how the country extricates itself from the past year’s trials.
A new president has been elected, but the incumbent has refused to acknowledge defeat and promise a peaceful transition of power. Two vaccines for the coronavirus are being distributed, but the prospect of the U.S. population achieving herd immunity is months away at best and uncertain to ever happen at worst. Still, real estate is a forward-looking industry, and those who make their bets early and decisively will likely wind up the biggest winners of an economic recovery.

WHAT WILL THE STORY BE FOR HOTELS IN 2021?

Black Salmon CEO Jorge Escobar (investment): Our firm anticipates increased distressed asset sales in 2021, with an industry recovery beginning to pick up in the second half of the year. Hotel properties that were previously for sale will be available at a more competitive price, anywhere from 15% to 40% less. With the distribution of the vaccine, I believe hospitality will be one of the first to feel signs of a comeback, given newfound appreciation for travel and pent-up demand from this past year.
Although visitor activity may increase, there will still be properties that find the best option is to sell, and that is where the opportunity will be for investors. We are still a few years out from telling the hotel comeback story.

WILL FLEXIBLE OFFICE SPACE BE IN A BETTER OR WORSE POSITION AS A PROPERTY TYPE?

JLL Senior Vice President and Senior Research Director Lauren Gilchrist (brokerage): JLL remains very bullish on the future of flexible office space in the mid-to-long term, especially now that millions of workers around the country have experienced what it is like to work in a non-centralized office. We predict that by 2030, 30% of all office space will be flexible. However, we think the layouts of flexible space operations will change to include more one- to six-person offices and less open desking area, along with slightly longer flexible lease durations of approximately one to three years. Until a vaccine is widely distributed and the economy has time to adjust, we expect more consolidation of flexible office providers and different management agreement and leasing structures to emerge.

WHAT WILL BE THE MOST COMMON REDESIGN ELEMENTS FOR BRICK-AND-MORTAT RETAILERS IN 2021? WILL THEY BE PERMANENT?

Tango founder, President and CEO Pranav Tyagi (analytics/lease management consulting): Many brick-and-mortar retailers had started to make the shift to “buy online, pickup in store” (BOPIS) services to compete with online giants like Amazon, but the pandemic accelerated this move to e-commerce (by five years) as “in-store only” retailers desperately tried to remain viable during months of consumers under stay-at-home restrictions. 
BOPIS enables a more integrated approach to inventory management, merging online orders fulfilled through distribution centers with in-store purchases of whatever inventory is on the shelves. To plan for this shift, many retailers are redesigning stores to accommodate for easy consumer access to BOPIS lockers with separate entryways and designated parking spaces. 
Another way for brick-and-mortars to remain competitive and provide frictionless shopping for consumers is through contactless self-checkout and/or Amazon Go-type experiences, where consumers can make purchases in-store on their phone without having to be checked out by a cashier or using a self-checkout station. 

IS THERE A PATH BACK TO PROFITABILITY FOR SHOPPING MALLS THAT DONT INVOLVE REDEVELOPMENT/INTEGRATION?

Newmark Capital Markets Group Vice Chairman Thomas Dobrowski, leader of the firm’s retail transactional and advisory group (brokerage): There is absolutely a path back to both profitability and sustainability for many shopping malls spread across the country. Most shopping malls already contain a healthy concentration of apparel, experiential [retail], dining and services, as the trend to diversify the tenant base has been ongoing for the past decade. Where there is a need, however, is for more omnichannel platforms to service consumers.

There is tremendous opportunity to create and adapt current locations into this new hybrid model, which integrates traditional elements of brick-and-mortar retail with industrial and logistics technology.COVID-19 has demonstrated that consumers want options when it comes to shopping, which include the convenience of ordering online, picking up at the store and returning or exchanging at the store.

Most shopping malls fit the bill to introduce this new form of omnichannel retail, as they are extremely well located, with great access and a great concentration of retailers that comprise many of the most in-demand e-commerce retailers. The bottom line is the landlords that are able to adapt and offer this type of experience and service will not only be able to survive, but thrive.

WILL THE DEMAND FOR ADAPTIVE REUSE PROMPT REDEVELOPMENT OF THE CORE URBAN OFFICE BUILDINGS?

LightBox Principal Analyst Dianne Crocker(consulting):It will not immediately prompt the redevelopment of the core urban office buildings. Much depends on where the chips fall in terms of employers with office space in central business districts opting to leave in favor of suburban locations.

Companies with expiring leases will be considering how much office space they need, especially if they don’t plan on having 100% of staff in the office full time. These decisions will take shape over time and not be immediate. Essentially, the jury is still out on this. It’s safe to assume to a certain extent that the oversupply of downtown office space that we saw even pre-pandemic will be more pronounced in hard-hit cities like NYC and LA, so some will need to be redesigned into uses that are more in-demand, but again, this will not be sudden.

BONUS PREDICTION – SELF STORAGE

Blackstone’s acquisition of Simply Self Storage(for which Newmark advised) and Cascade Investment’s investment in the Storage Mart platform are representative of the diverse sources of capital flowing into the sector. This collection of growth capital will lead to self-storage transactions pricing more in-line than ever with the core real estate investment product types.

Leading into the early spring of 2020, self-storage operating fundamentals were indicating a robust leasing season with rebounding market rental rates. With the challenges of COVID-19, the traditional leasing season for self-storage was muted. However, activity rebounded throughout the second half of 2020 and the industry enters 2021 with all-time record-high occupancy. Given the operating strength with which the industry enters 2021, the expectations from early 2020 indications have been pulled forward and 2021 will be a benchmark year for rental rate growth, revenue growth and average annual occupancy.

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