The Fate of Private Commercial Real Estate in 2021

The long-lasting effects of the COVID-19 pandemic are starting to take shape on the commercial real estate market, giving us more insight into its near future. Some CRE sectors have recently started to flourish, while others have remained stagnant.

Overall, the outlook for private commercial real estate in 2021 is positive. Many sectors are gaining traction and showing no signs of slowing down. Some of this year's winning sectors include industrial and logistics, alternative sectors, and multifamily housing.

Winning Sectors

There are several sectors across the United States that are seeing a lot of opportunities for growth in the private commercial real estate industry. This includes the multifamily housing sector.

Industrial and Logistics

With the rise of remote work and "corporate nomad" culture, the demand for operations and logistics support is high as the workplace continues to decentralize. Production, manufacturing, and distribution form the backbone of many companies and require flexible, cloud-based travel and expense management solutions.

There's also strong demand for warehousing space, creating opportunity for private real estate developers and investors.

Multifamily Housing

Many urbanites have moved out of their big cities and into the suburbs or other areas where the cost of living is not quite as high, but these newly desired areas rich in multifamily housing are filling up fast.

Where population grows, so does the need for affordable housing. This creates unique opportunities for developers to meet the needs of singles and families in need of such housing.

Alternative Sectors

Alternative sectors cover essentially anything that is not a “traditional asset.” This includes healthcare facilities, storage facilities, and more.

Because of the pandemic, these sectors are thriving. For example, people are realizing they need more storage space due to downsizing and healthcare facilities are seeing more business. Investors can use this information to make equitable, valuable purchases.

Losing Sectors

Some of the losing sectors in today's commercial real estate market include:

Hotels

Simply put, people are not traveling as much as they used to. Because of the pandemic, the hospitality and tourism sectors have taken a nosedive. When we first entered the global pandemic, travel restrictions were put in place stating that people could only travel if and when absolutely necessary.

Even now, with most of those travel restrictions lifted, many are still cautious about traveling, leaving the industry to deal with the repercussions.

Retail

Retailers are facing significant challenges in the recession we find ourselves in. With shoppers facing drops in disposable income and the increasing popularity of online shopping, retail companies are hesitant about expanding or leasing new commercial spaces.

Even before the pandemic hit, large department stores like JCPenney and Sears were struggling to stand up against online shopping trends. And with 230.5 million people predicted to shop online in 2021, it should come as no surprise that retail commercial real estate is not a winning sector.

Office Space

Many companies are downsizing or moving to either hybrid or permanent remote work. The demand for new office space is decreasing, making it one of our losing sectors in 2021.

Even with some people returning to the office space for work, the irreversible shift towards remote work has dramatically altered the way most businesses look at expense management. Many are finding it increasingly difficult to justify office space rent.

Inflation Forecasts

According to experts, higher inflation is here for the long haul. Between 2021 and 2023, the inflation rate is expected to increase annually by an average of 2.58%, bringing it to levels not seen since the early 90s.

This inflation forecast may be negatively affecting the attractiveness of commercial real estate today; however, the multifamily housing, student housing, and storage sectors can still provide investors with attractive short-term lease opportunities.

Inflation becomes even harder to predict when you're transitioning to a post-pandemic economy. But the opportunities in private commercial real estate aren't washed up just yet.

Predictions for the Rest of 2021

As we move forward, we will continue seeing the effects of the COVID-19 pandemic on the commercial real estate industry. While we emerge from the recession, there will be both positive and negative impacts on commercial real estate.

  • People will continue working from home: This means that there may never be as high a demand for office space as there was before the pandemic. Businesses are changing the way they use the physical office and this will continue to affect the commercial real estate industry.
  • Interest rates will remain low: The Federal Reserve is expected to keep interest rates low while we come out of the pandemic. These low interest rates should positively impact commercial borrowers.
  • Major cities will continue to see population declines: Cities like New York, Los Angeles, and Chicago have seen higher population declines since the onset of COVID-19. People are seeking the suburbs to find better housing opportunities and lower costs of living.

These are just a few of the predictions that we expect to see for the rest of 2021.

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