Despite widespread availability, vaccine distribution has slowed as tens of millions of Americans declined to participate, leading to a fourth wave of accelerating infections particularly in areas with lower vaccination levels. Against this backdrop, the US economy, propelled by significant fiscal stimulus, continues its return to pre-pandemic levels of economic activity. The sharpest and shortest recession in US economic history is over.
Nonetheless, significant displacements remain in many parts of the US economy. Notably, as illustrated in Figure 1 below, the number of unemployed remains nearly four million above the pre-pandemic low of February 2020, while the number of open positions employers are attempting to fill has surged to an all-time high of 9.2 million, over two million above the February 2020 level. This mismatch between workers and employers has manifested in localized labor shortages, particularly in low wage and public-facing service sector jobs such as food service and hospitality.
Figure 1 – Number of Unemployed and Open Positions (000s)
Source: Bureau of Labor Statistics
Commercial Property Rebound
Industrial Sector: Favorable Despite Consumer Habits
The broad substitution of logistical space for in-person retail, under way for some time, was accelerated by the pandemic and related changes in what businesses and consumers require, and where/how they access it. Industrial demand growth has largely outstripped supply growth for a decade, leading to declining availability and outsized rental increases.
E-commerce channel growth and broader spending on goods has been a continued trend supporting rising industrial space demands. Overall consumer spending took a dip during Covid, but spending on goods fared significantly better than services, given consumer inability to spend on in-person services.
Data shows that consumers expect they will continue to shop online with goods delivered more often post-pandemic than they did pre-pandemic. With spending on goods booming in 2021 and e-commerce sales continuing to expand, the perspective on the industrial sector is highly favorable in both the short and long term.
Office Property: Uncertainty of Future Work Dynamics
The correlation between employment and office space demand is shifting in real time as many employees integrate some form of a hybrid work model, but the longer-term dynamics remain in question. The share of employees working from home due to the pandemic has been decreasing through 2021, particularly at the onset of summer. As illustrated in Figure 2 below, per the Bureau of Labor Statistics, the percentage of employees working from home in June 2021 is down by more than half from its May 2020 peak. While steps are being taken towards returning to work, the Delta variant may certainly lead to apprehension among workers if the rising case counts continue.
Figure 2 – Employed Persons who WFH in the last 4 weeks due to the pandemic
Source: US Bureau of Labor Statistics, AEW Research
Despite uncertainty in the sector, some metrics show signs of office demand returning in the long term, as evidenced by high leasing activity. In fact, some of the largest leases signed this quarter were by tech firms like Apple and Hulu, as well as several life sciences companies. We at AEW Research affirm the belief that many firms will still embrace a hybrid work environment. 2Q 2021 did see a strong return to the office, which is positive for the office outlook and supports the idea that when it is safe to return to the office, workers and companies will do so.
Apartment Sector: Strong V-Shaped Recovery
Retail Progress Report
The improvement in fundamentals was driven by firming demand and continued modest construction. Improvements prevailed in multiple segments of retail, including the neighborhood and community shopping center segment (NCSC) and the power center (PC) segment, which has struggled in recent years. The lifestyle and mall (L&M) segment showed positive indications of recovery in late summer / early fall 2020, but has since stalled.
Continuing improvement in sales levels and consumption will largely depend on the strength and direction of the broader economy. Overall, though, we anticipate market fundamentals in all retail subsectors to continue to improve into 2022.
Competitive Transaction Market
We are of the view that the transaction market has fully returned to pre-pandemic pacing, and we expect activity to remain strong through 2021 and into 2022.
Capitalization rates across all sectors have compressed in the open market. Going forward, with a wave of capital waiting to be deployed into real estate, we expect the transaction market will remain competitive, with prospects for the strong continued recovery translating into better rent and net operating income (NOI) growth, which will ultimately be capitalized into values. Our bottom line is that we expect cap rates to remain around their current level or perhaps nudge downward.
The views and opinions expressed are as of August 2021 and may change based on market and other conditions.
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
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