12.16.21 | Industry Insights
On November 17th, Berdon hosted its 5th annual Real Estate Industry Executive Forum featuring some of the most insightful thought leaders in the industry.
The Forum focused on both the current state of the New York and national real estate markets as well as the impact COVID-19 has had on the U.S. economy and the New York Metro Real Estate Market.
Berdon Senior Principal, Thea Kruger, and Brookfield’s Managing Partner and Head of the U.S. Office, Ben Brown took a deep dive into the state of the national and regional real estate markets.
The conversation kicked off with a focus on the office sector. Brown acknowledged that while “we don’t know where the future of office is going,” what we have seen is that COVID drove policy decisions from health to quality-of-life issues—and these concerns are weighing on tenants’ and companies decisions and how they utilize office space.
People have changed their behavior over the past year and a half, said Brown. Trend now is toward flexibility – but that means different things to different people. It is no longer a discussion about ‘if’ but ‘when’ workers return to the office. Brown observed that there is a lot of uncertainty out there. But in that uncertainty, there are opportunities, especially now that we are coming out of “the fog” of all these COVID regulations.
And as Brown observes, local policy seems to be the driver of whether workers are returning to the office, noting that buildings in New York are at roughly 30 percent occupancy, but they are in the single digits in San Francisco.
Brown believes that COVID has accelerated a “flight to quality” in the office sector as well, and we continue to see a “delinking” of rents and occupancy.
If the COVID crisis has made a mark, as it surely has, on the commercial real estate market, what has been its effect on the residential market? Kruger and Brown discussed what they see as the massive rebound in residential occupancy rates in New York which, as Brown noted, dipped down near 70 percent during the crisis. Brown expected some “tail risk” to the urban residential market as a result of workers not being required to work in the office 5 days a week, but according to Brown what we have seen now is urban centers outperforming in recent months. And the reason is pretty straightforward: cities, especially cities like New York, have a lot to offer.
The second half of the forum featured a ‘fireside chat’ between Andrew Husby of Bloomberg Economics and Lindsay Dutch of Bloomberg Intelligence, moderated by Berdon Partner and co-leader of the Berdon’s Real Estate Practice Maury Golbert.
They provided an overview of the impact COVID-19 has had on the national economy along with the effects on New York’s Metro Real Estate Market.
Husby and Dutch drilled down to the specifics of the post COVID U.S. economic recovery. This is in some ways a unique recovery that differs in a number of ways from past post-recessionary environments.
According to Husby, the top lines are these:
- Wages, income and prices are all above trend
- Bottlenecks and logistic strains are the worst since 1970s
- Supply chain snarls may last longer
- Labor slack did not crush compensation this time around
- Workers have secured wage gains after pandemics
- Households have more than $2 trillion in extra savings
- If constraints don’t ease, inflation is likely to stay above 5% next year
- There has been an unprecedented run for equities
Husby also pointed out in his presentation that in terms of the Real Estate Market, the home prices to rent ratio has skyrocketed. But there are some potential downsides to be aware of. Husby speculated that if the Fed is forced to pump the brakes and raise rates, this might take the legs out from under the consumer and have consequences for household spending. Husby forecasts that the Fed may increase rates to 2% by 2024. Inflation and supply chain snarls are already having a deleterious effect on what Husby called “the consumer psyche.”
Golbert and Dutch took a look at what all this means for the NYC real estate market. Dutch sees a lot of uncertainty in the market and a lot of variability depending on what sector one looks at. In terms of the office sector, Golbert, noting the uncertainty of the situation, wondered: What will it take to get people back to work?
Dutch confirmed that New York office occupancy is around 30 percent and indicated that in her view, the process of getting back to the office has been much slower than initially anticipated. Golbert noted that companies are not giving up on their leases. But offices are going to be remodeled to take into account COVID-era related health concerns. In other words, the desk-sharing model is likely a thing of the past.
Nationally the picture, as Brown had noted earlier, changes state by state. Office occupancy is lower in California but higher in cities in Texas. With that said, Dutch believes that the hybrid model of work – part of the week at home, part of the week at the office – is here to stay.
What about the national economic picture, which, as Golbert observed, is being driven by a kind of frenzy for consumer goods? Husby noted that if you look at the latest services spending reports, discretionary consumer spending, such as going out to restaurants, may have staying power.
On the real estate side of things, Golbert noted that “location matters.” Dutch agreed and observed that during the heat of the pandemic, the coastal markets were drastically underperforming, but the big landlords were not giving up on those properties, because over the long run people want to be in cities like New York.
For the full recording of the webinar please click here.
Questions? Please contact your Berdon advisor.