Flash Call Summary
The harsh jobless claims are likely concentrated in face-to-face service industries. Ultimately, we expect that GDP for accommodation and food service could fall by up to 40% in Q2 2020, relative to our previous outlook. Retail, entertainment and travel are poised to decline by a quarter. Warehousing and logistics could be a mixed bag, as some major corporations have announced hiring plans. Predictably, the health care sector and Federal outlays are likely to increase.
Although the impact of Covid-19 will be systemic, some places will feel it more than others. Places with a sizable public sector, like Washington D.C., Sacramento, San Diego and Norfolk, won’t see as bad of a decline in their local economy. Some tech hubs, like the San Francisco Bay Area and Boston, should also be relatively insulated. Major tourism hubs, like Orlando, Las Vegas or Miami, should see the greatest downgrade, and key airline hubs, like Atlanta, Charlotte or Chicago, will also feel the negative impacts.
On a positive note, we expect this downturn to be different from previous cycles which took years to stabilize.
Social separation protocols and fear will contribute most to the willingness to travel. We expect the hospitality industry to feel the negative effects of the pandemic for 12 to 16 months, but the bounce back will ultimately be determined by the control of the outbreak. A U-shaped recovery is possible if the virus spread continues to intensify or rebounds after isolation orders are lifted. We expect declines of 30% in demand and 10% in ADR in 2020, with demand recovering by the end of 2021 and ADR by 2022.
Luxury hotels are expected to be hit the hardest, and economy hotels the least. As far as location, urban and resort hotels are feeling the biggest impact, with small town and interstate hotels not yet as affected. Gateway cities and coastal metros, as well as New Orleans, are experiencing the hardest hits so far.
We expect mall vacancy to increase 5-6%, and neighborhood community centers to increase 1-2%. Our long-term forecast scenarios may include additional e-commerce penetration.
If we move toward a more virtual society (contactless payment, video chats with sales associates, more online grocery and e-commerce penetration), retailers, investors and developers will feel more long-term impacts.
Consumers are likely to continue reducing their spending for several quarters after the pandemic subsides.
In the short-term, apartments will hit a speed bump in Q2 and feel the bigger impact in the second half of the year. Vacancy is expected to rise from 4.1% to 5.7% at its peak; rent growth will dip from 2.6% to -3.4%. This is largely driven by an increase in unemployment, but also by uncertainty.
In the long-term, this will be a blip. Demand and preferences for urban living remain, and jobs in the urban core are likely to stabilize. We expect multifamily to return to equilibrium by 2023.
Fortunately, no market is extremely vulnerable. Some are more vulnerable because of their industry drivers, such as Las Vegas, but all markets have some hedge against the downturn, and as employment settles, people will flock to discounted rentals. As such, we expect urban apartment demand to outpace supply.
We forecast a medium increase in vacancy, which would correspond with medium-sized past recessions, and is much below the recessions from 2001 and 2008-2009. Construction delays will lead to a slowdown in supply. Several unknowns that could affect the office market include:
- Information Technology. This sector played a major part in U.S. office lease growth. This recession can prove the maturity of the tech sector and stability of the digital age.
- Energy. Recent declines in the price of oil could negatively affect Houston’s office market, which is still recovering from oil price declines in 2014.
- Flexible office. This sector is facing strong headwinds. The supply of new flexible office is expected to decline, but current uncertain conditions are peaking interest from tenants to consider moving into flexible office.
Industrial real estate trends have some mixed effects in the short term. Manufacturing is likely to see a larger impact. E-commerce is gaining share significantly as social distancing continues and many stores are forced to temporarily close.
In the long term, industrial is likely to be well-positioned. Retailers and manufacturers are likely to carry more inventory than they previously did, in preparation for future shocks. E-commerce is likely to have a higher share of total retail sales even after retail locations reopen.
These effects are evident in our updated industrial outlook. Net absorption is now expected to briefly turn negative over the next few quarters. Availability rates will rise noticeably in the near term but decline thereafter and stay significantly lower over the long term. Rents decline slightly before resuming their upward trend and are projected to grow at a faster pace.
Flash Call Recording
CBRE EA COVID-19 Client Flash Call
March 27, 2020 at 12 PM ET / 11 AM CT / 9 AM PT