The Economic Recovery and Outlook for U.S. Capital Markets

Key findings include:

• The most common description of the projected U.S. economic recovery is a “swoosh” shape, with the sharp downturn of the second quarter of 2020 being followed by a slow recovery with a long tail. This remains the most likely outcome, notwithstanding the surprisingly upbeat May employment report. However, the commercial real estate capital markets are likely to rebound faster than the overall economy due to the substantial liquidity available.
• Multifamily returns are closely correlated with changes in employment—even more so than are office returns. The economic effects of COVID-19 could dislocate office’s correlation to employment even further—and keep some would-be home buyers in multifamily units. Among all major property types, GDP is least correlated with NCREIF’s industrial index, indicating that the industrial market is benefitting from secular growth trends, outside of the typical business cycle. These findings underscore the relatively strong position of the industrial market during the uncertain period ahead.
• Opportunistic funds have been activated by the decline in operating and property fundamentals. They will be seeking opportunistic monetary bases in property acquisitions, thereby effecting higher risk-adjusted investment returns through a new hold period established in the wake of the pandemic.
• A tension exists between future office space demand lost to more remote work, and potential growth in demand due to greater social distancing inside the office environment. Between February 2020 and May 2020, the United States lost 5.4 million office-using jobs, or 8.7% of all office-using positions. At May 2020, approximately 128 square feet was occupied per office-using position, meaning the perceived long-term need for office space declined by 688 million square feet as a result of those lost positions, equal to roughly 8.5% of the U.S. office inventory. Much of that space will be under lease for months or years to come, and many of the lost positions will be restored over time, but the scope of the present challenge to the office market is significant. However, the sense of isolation and loss of corporate culture in the work-from-home environment may encourage tenants to retain considerably more space.
• To the extent some companies invite more of their staff to work from home, the COVID-19 crisis may underscore the value of suburban multifamily assets. This asset class features non-cyclical characteristics.
• Opportunistic investors, particularly in the multifamily space, have circled hotels as a property type ripe for conversions.