What a year 2020 has been! The pandemic struck, unemployment has hit records, there was a nice rebound in the summer, and recently a downward trend due to the spike in Coronavirus cases. What does 2021 hold for the economy, interest rates, and residential and commercial real estate? Is the stock market correct in calling the all clear with a v rebound?
2021 Economy Predictions
It is impossible to discuss the fate of the economy without discussing the roll out of the vaccine. In the last few weeks two vaccines were approved and vaccinations have begun in earnest throughout the country. Unfortunately, the vaccine unto itself will not fully solve the pandemic we are in, enough people have to get vaccinated (about 70%) to fully contain the disease.
According to a poll of NY firefighters, 55% said they would not get the vaccine (ABC), if this ratio holds true for the country, it will be a bit longer before the virus is under control. Furthermore, in Colorado, I saw that at best case the vaccine would be available sometime in June.
Long story short, the vaccine will not immediately solve the woes that the pandemic has wreaked upon the economy. A v-shaped recovery is highly unlikely and the stock market is over promising. Unfortunately, this recovery will more likely be a swoosh or K shaped recovery. How will this impact real estate?
2021 Interest rate predictions
I don’t see any large upward movements in rates until at least 2023, the federal reserve will do everything in its power to hold down rates as long as possible. Furthermore with the number of people unemployed there will be little pressure on wages and in turn inflation. Look for rates to stay at or near rock bottom lows for a while.
2021 Commercial Real Estate Predictions
In general, commercial real estate is in for a rough year (actually many years) as the economy adjusts to the changes brought on by the pandemic.
Office: Companies will work in earnest to reduce their office footprints as the work from home movement reshapes their need for space. It will take several years or more to absorb the changes in the office sector. Look for rents to fall 10-20% in most markets with some as high as 30% in coastal urban cores.
Retail: The failures in the retail sector will continue to pile up as Amazon, Walmart, and others dominate the shift to online. It will be challenging to find tenants for many of the large big box vacant spaces, in good markets the sites will be totally redeveloped/imagined but in the interim look for losses to continue to pile up
Hotels: We haven’t seen the hotel apocalypse yet. As business spending on travel is slashed hotels will be a huge casualty. Many in the industry will end up failing over the next 12-24 months.
Restaurants: I’ve seen statistics as high as 30% of all restaurants will go under in the next year or so. The industry will eventually come back, but how much and how quickly is the million dollar question.
- Banks: the number of branches will be reduced between 30-50%, the pandemic forced the adaptation of consumers to online banking and the physical branches are no longer necessary, look for substantial reductions in bank branches in 2021
- Malls: They were dying before the pandemic, but the virus put the nail in the coffin.
- Bowling alleys: They were struggling before with aging demographics, look for many to go the same route as the roller rings of the 80s
Two bright spots in commercial real estate:
- Light industrial: As e-commerce continues to dominate distribution demand will continue to explode
- Multi Family: Multifamily in non-high priced coastal markets will perform well as a large migration takes place out of the high-cost cities to more affordable venues. Look for this trend to continue and likely accelerate in 21.
2021 Residential Real Estate Predictions
Residential will be the bright spot in real estate with considerably more upside than downside risk. With many commercial properties underperforming, many institutional investors will continue to pile into the residential market putting a floor on price declines due to the huge demand for yield (return)
With interest rates staying low well beyond 21, residential real estate in non coastal high priced urban markets will continue to perform well. I don’t think we will see a continuation of the insatiable appetite for residential real estate like we saw in 2020; residential real estate appreciation should begin to moderate in 2021 in most markets.
It is quite ironic that the last great recession about 12 years ago was caused by excess in the residential market. Now it is the commercial market’s turn for a major reset. The residential market will be one of the primary drivers to help us plow through the pandemic recession as appreciation continues creating relative wealth for millions of homeowners. Although residential real estate will likely outperform other assets, note that 2021 will not be smooth sailing, the economy will not magically flip a switch and turn back on as millions of jobs were displaced/eliminated as a result of the pandemic. Ultimately the displacement of the economy will slow residential sales as well.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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