How Will the U.S. Economic Recovery Effect Commercial Real Estate?

A new report released by the Bureau of Economic Analysis (BEA), a division of the U.S. Department of Commerce responsible for analyzing and reporting economic data, announced that Real Gross Domestic Product (GDP) grew by 7.4% in inflation-adjusted dollars in the third quarter of 2020. as businesses recovered from COVID-19 and continued to reopen. Sustained annual growth at this rate would translate to a 33.1 percent increase in GDP over the year. That is the fastest pace ever recorded in the history of the United States.

Gross Domestic Product is a comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The GDP growth rate is the most popular indicator of the nation’s overall economic health. It serves as an indicator of the country’s productivity and is calculated using the formula: GDP = C + G + I + NX where “C” is all consumer spending, “G” is the sum of all government spending, “I” is the sum of all business spending, and “NX” is total exports less total imports (net exports).

Some have called this a “V-Shaped Recovery” because it resembles the shape of a “V” meaning there was a sharp decline followed by a rapid recovery in economic activity. The graph below illustrates this point.

What impact will this “V-Shaped” recovery have on commercial real estate in the U.S.? As employment continues to recover, retail sales are returning to pre-pandemic levels. This sector was hit especially hard from the COVID-19 virus. Although it made up 9% of total GDP in 2019, it accounted for 35% of the decline in second-quarter GDP. In store clothing sales have declined dramatically but purchases of autos and parts, health and personal care products, food and beverage, sporting goods, books, music and building materials have all increased significantly, especially with the trend toward more non-store, e-commerce purchases.

Another slice of the economy that has been hit hard is the healthcare sector, especially visits to doctors’ and dentists’ offices and elective surgeries also the travel and lodging/hospitality sectors have seen the highest declines. It is predicted that these segments may take longer to recover and may not fully come back until a vaccine is available.

The office sector has also faced significant challenges and may undergo extensive changes in the months to come. It is unclear how much overall demand for office space will decline due to the work-from-home trend. There are some drawbacks in working from home, like fewer face-to-face meetings and planning activities that require in-person collaboration. It does appear that even with the recovery, there will be less demand for traditional office space in the future.

The senior living sector of the economy will continue to struggle even with the baby boom generation heading into retirement. Older people have been reluctant to visit senior housing facilities even with the increased emphasis on cleaning and providing PPE.

Two sectors of the commercial real estate world that will continue to improve unabated by the pandemic are multifamily housing and industrial development, including infrastructure and data center development. Use of the internet and logistic centers to handle the distribution of goods ordered over the internet will continue to fuel growth in these areas.

In summary, even with a “V-Shaped” recovery, the hotel and travel industry and the retail industry will continue to take months, if not years, to fully recover. Office buildings will continue to experience significant changes while the multifamily and industrial sectors will continue to experience robust demand.