During this unprecedented time, it’s hard to know how things might change from one day to the next. As data becomes available, CBRE has published regular updates on the impact COVID-19 is having on commercial markets throughout the US and the rest of the globe. Excerpts from the latest overview for the week ending April 24, 2020 are included below. The full review, along with weekly updates, can be found at www.cbre.com/covid-19.
ECONOMY | Oil Crash Exacerbates Economic Downturn
The deepening oil price crash is one of the more predictable lagged consequences of the COVID-19 crisis. In the medium term, cheaper oil is good for the US economy. In the short term, it will create additional economic headwinds as oil producers invest less and the stock market becomes more volatile. Further steep production cuts in the US should result in the price of West Texas Intermediate returning to $30 per barrel in the medium term. Direct government aid to the oil and gas industry will benefit US oil-producing regions.
Q2 will bear the brunt of economically destructive lockdown policies, but growth will gradually resume in Q3. Nevertheless, the shock to the economy will reverberate for many quarters to come.
OFFICE | Leasing Slows, Vacancy Edges Up
Office markets have remained relatively insulated from the most damaging effects of COVID-19 so far, but signs of deteriorating fundamentals emerged in late Q1. Leasing activity declined by 18 percent in Q1 and an increasing share of it was in tenant renewals rather than new leases. Overall office vacancy rose by a relatively mild 20 basis points in Q1 and absorption was at its lowest level since 2013, as increases in sublease space began to affect various markets. Market fundamentals are expected to deteriorate further in Q2 and likely beyond as the effects of COVID-19 impact the economy more broadly.
FLEXIBLE OFFICE | An Immense Short-Term Challenge
While some flexible office locations have temporarily closed, those that remain open are experiencing little to no use given shelter-in-place restrictions. Many operators are furloughing or laying off staff and entering rent renegotiations with landlords to remain solvent. Several small flex operators have permanently closed and more closures are expected in Q2. Any new space commitments are expected to be extremely limited to only the most opportunistic operators and likely not via traditional leases, but as partnerships and management agreements.
RETAIL | Sharp Decline in March Retail Sales; More to Come in Q2
While Q1 retail real estate fundamentals were largely unaffected by COVID-19, stay-at-home orders and nonessential retail store closures that went into effect late in the quarter resulted in an 8.7 percent drop in March retail sales. Q2 retail sales will largely depend on the duration of the shutdown but likely will be hard hit. The effects of closures and nonpayment of rent will lead to lagged weakness in net absorption, availability rates and rent growth in Q2.
INDUSTRIAL | Solid Q1 Reflects Strength of Sector, but Slowdown Expected in Q2
The industrial market posted a solid quarter, showcasing the strength of the sector prior to the COVID-19 pandemic. Net absorption was positive for the 40th consecutive quarter, average asking rents increased 4.8 percent year-over-year and, despite speculative development, the overall vacancy rate increased by only 10 basis points quarter-over-quarter. Declines in transportation volumes, jobs and retail sales point to a significant slowdown in leasing activity and a moderate increase in vacancy in Q2. The industrial sector is best positioned to rebound in the long run due to higher e-commerce sales and changes in supply chain strategies that will rely on additional industrial space.
HOTELS | Occupancy Levels Expected to Bottom Out in April
Hotel occupancy was down 16 percent nationally in Q1 and 42 percent in March. Occupancy levels are expected to bottom out in April. Optimists can point to an occupancy level of 23.4 percent last week versus 21 percent the previous week, although the Easter/Passover holiday season may have played a role. Pessimists can point to Europe, where occupancy levels are still at historic lows even as many countries are weeks past their peak rates of new COVID19 cases. Hotel closures have now amounted to more than 16 percent of existing rooms in the US and nearly 65 percent in the luxury segment.
MULTIFAMILY | Rent Declines, Vacancy Increases in Late Q1
Q1 data confirms that the multifamily sector was performing well prior to COVID-19, but statistics for March 11 through April 21 show a different story—rent growth dropped by nearly one percent (annualized 7.7 percent) at a time of year when rents normally rise. Vacancy edged up by 12 basis points, and a greater increase is expected in Q2. Rent collections in April were better than earlier expected, but still underperformed pre-COVID-19 levels; 89 percent of renters had paid full or partial rent as of April 19 compared with 93 percent in the prior month and a year ago.
CAPITAL MARKETS | Shelter-in-Place Orders, Economic Uncertainty Dampen Activity
March investment volume was down significantly from January and February as the impact of shelter-in place orders and growing economic uncertainty dampened activity. Q2 volumes likely will be significantly lower due to difficulties conducting property tours and due diligence, as well as uncertainty regarding pricing and values in a rapidly changing economic environment. Capital markets activity should pick up later in the year due to loosening shelter-in-place restrictions and resumed economic growth. A recovery in transaction volume will lag due to the amount of time required to complete deals. Values likely will decrease in the short term due to NOI/fundamental deterioration, though cap rate increases may be more muted due to a declining cost of debt capital.
ASIA PACIFIC | China GDP Contracts in Q1, but Revival Underway
China’s Q1 2020 GDP report on April 17 was keenly awaited by market observers to gauge the impact of COVID-19 on economic and business activity. Although the 6.8 percent year-over-year contraction in GDP was widely anticipated, it marked the first drop since 1992, with sharp declines recorded across nearly all key macroeconomic indicators. However, January and February’s bleak data was followed by a much-improved performance in March as economic activity resumed.
China’s real estate market has also enjoyed a revival, with office leasing activity rebounding in late March and shopping mall footfall recovering to 50 percent of pre-crisis levels by early April compared with just 20 percent in February. Although logistics net absorption turned negative in Q1, rents have performed resiliently in the face of significant lockdown-related disruptions. In the capital markets, real estate investment is now picking up after coming to a near standstill in February, with ample liquidity and lower interest rates expected to drive a strong rebound in purchasing activity by domestic investors in H2 2020.