The great unknown
A dicey 2020 makes for a cloudy ‘21 outlook
Does the following scenario ring a bell?
“Our company had one of our best years ever in 2019, and 2020 looked to be much the same in terms of all our divisions—leasing, land sales, and development—as well as within our own property management group. We were expecting more of the same, and then everything changed.”
That’s how Brad Ashley, CPM, describes the turn of events driven by COVID-19 that virtually every IREM member faced this year. As managing director of Newmark Grubb Zimmer, AMO, in Kansas City, Missouri, Ashley oversees 10 million square feet of local commercial property, including office, industrial, and retail. His “best year” scenario was made even more bittersweet by the fact that the Kansas City Chiefs had just won their first Super Bowl in half a century. There was a citywide euphoria in early February that would be gone by mid-March.
Super Bowl wins aside, Ashley wasn’t alone. “The U.S. economy was performing exceptionally well when COVID-19 appeared,” says Lawrence Yun, chief economist for the National Association of REALTORS® (NAR) in Washington D.C. Then, almost overnight, “the whole U.S. was on lockdown.”
Amy D. Martin, CPM, went through the same directional shift. “Our sights were set on securing new opportunities in Denver, Utah, Arizona, and, where possible, California,” says the senior property manager for the Los Angeles-based Muller Company. Martin manages Westwood Medical Plaza, a 155,000 square-foot medical office complex in Los Angeles.
“Our company’s longer-term strategic plan was to increase our real estate profile with the purchase of several properties,” she explains. The pandemic threw a monkey wrench into those plans, and while she says that the long-term goals remain, much of the emphasis turned to “properly overseeing our financial health while continuing to manage our current holdings.”
But creating value isn’t always easy, especially as building upgrades are put on hold by owners. “Each owner is a little different,” says Ashley. “Some are sticking to their model and their budget.” Others, not so much.
He tells of one client who charged ahead with plans for a large solar array on the roof, “because he was a long-term holder and knew the project’s value.” On the flip side, he tells of institutional and private owners alike who have pulled back on the reins, pending a solid sign of upturn. “‘If it’s not broken, don’t fix it’ seems to be the more common approach.” However, he adds that whatever the firm has saved on the capital side has gone into cleaning, health, safety, and other COVID-19- related operational protocols.
One of the many peculiarities of the current pandemic is its changing nature and the regionality of its impact. Just as certain sectors are faring better than others (industrial remains robust, says Yun, while retail is taking a major hit), so too does the story vary from locale to locale. NAR’s recent 2020 Market Recovery Survey underscores those variables.
Of the more than 2,300 responses, 45% reported that their locale was “slowly entering recovery,” while 9% haven’t tasted any recovery yet. Interestingly, 28% say their local markets are hotter than ever.
“Many in California have had to shut down their businesses with no real definitive reopening time frame,” says Martin. “To top it off, our state’s governor and our mayor are contradictory in their directives and management.” This inconsistency has led to suffering and lost revenue for employers and employees alike.
Kansas City, on the other hand, “tends not to experience either the high-highs or the low-lows that bigger coastal cities do,” says Ashley. What it does experience is inconsistency from state to state, straddling Kansas and Missouri as it does. While there are efforts to align politically, “Kansas approaches business and the concerns of COVID-19 differently than Missouri. We believe we’ll rebound well, but it’s definitely been a slow go.”
Canada, too, has seen regional variance in terms of its return to normal, says Winson Chan, vice president of sales development for Tridel, a condominium developer in Toronto. In fact, in Ontario, while the province moved through its increasingly open stages of recovery, it was hit in mid-June with a slight uptick in daily COVID-19 cases—just over 200—enough to raise concern over a relapse and a return to stronger public messaging about proper care. (Chan was also 2018–2019 president of the Real Estate Institute of Canada, IREM’s partner to the north.)
The good with the bad
Of course, with crisis comes opportunity, and all the IREM members interviewed used the time in lockdown to advance their strategies or redefine their operations. That ability to make omelets out of broken eggs would help their collective outlook for the coming year (more on that shortly).
Despite the capital challenges Ashley describes, the creation of value during the downturn is still any property manager’s most important goal. “In the past you always heard how important it is for us to create and drive value,” he says, “and value always meant saving money. In downturns it’s even more important. But value also comes in making our tenants feel safe and comfortable, all while operating our buildings efficiently.”
In what Chan describes as a “frozen economy,” his firm found “the opportunity to fast-forward platforms we had before, such as virtual meetings.” Packaged as Tridel Live, the meetings continue what he says his sales team does best: “meeting with customers and showcasing our homes.” It also represents the tip of the iceberg in terms of accelerating the firm’s broader technology platform to make the entire process more efficient.
Martin sees her corporate glass as half-full as well, and she attests to the same adaptability: “Our team has been able to adapt and adjust. We’ve learned new ways to interface with a variety of online communications, allowing us to more effectively manage our projects. Our company has been exceedingly adaptable, which has afforded us the ability to become an even more effective property management firm.”
That’s the spirit, and it’s one that shifts the emphasis from crisis to control, especially set against the backdrop of an economy that seems to be cooperating overall. By all accounts, economic projections for 2021 are neither bell ringers nor handwringers. Overall, the Congressional Budget Office, in its July Update, saw the recovery as doing better than generally expected.
“Real (inflation-adjusted) gross domestic product (GDP) is expected to grow at a 12.4% annual rate in the second half of 2020 and to recover to its pre-pandemic level by the middle of 2022,” the report enthuses. Further, it projected that unemployment would peak this quarter and then, “fall quickly as output increases throughout 2021.”
Yun doesn’t put too much stock in such specific dates, particularly as we drill down into specific sectors, such as commercial real estate. “Whenever there’s a job dislocation, it takes some time to regain those jobs,” he says.
The good news is that our industry (at least for the most part) was well- positioned in January. “The good thing with office is that we didn’t overbuild,” he says. And despite vacancies, companies with office-based workers are doing reasonably well. “They’re holding on and they can make those rental payments.”
Further, Yun sees more leasing next year in both apartments and office space, although office will have a tougher time of it, due to greater work-from-home options. “Even as jobs are created,” he says, “office leasing will be subpar compared to the employment recovery.”
In addition, both industrial and multifamily have remained relatively robust. And given the current low interest rates, ditto for single-family home sales. Taken together, the tea leaves indicate an upward trajectory, even if the tea is a little weak.
“In all, I would characterize the economy as recovering,” Yun says. “But how long will it take? Maybe another 12 months to fully get us back. Naturally, a vaccine discovery would quicken that pace.”
Then there’s retail, the perennial poster child for economic upheavals. While online sales have traditionally battled the much-touted “experience” of in-person shopping, the coronavirus-induced preference to leave your mask hanging on the doorknob and shop from home has tipped the scales. CNBC states that online sales in Q2 hit $211.5 billion, a massive 31.8% jump over the first quarter.
It’s a dynamic that’s bound to linger into 2021 and not just because of the safety of ordering online. “Retail in downtown areas especially will see a long struggle simply because fewer people are coming to downtown than before,” Yun adds.
Making their way
Of course, 2020 was not simply the Year of COVID-19. Other news as well will impact the outlook for the coming year. Until November, at least, the uncertainty of the presidential election looms large, and the civil unrest witnessed in many U.S. cities is having an impact as well.
On one hand, Yun voices confidence in the election process. “America understands the process,” he says, “and it will respect the outcome, especially if there are clear-cut results.”
The looming threat of social unrest causes a bit more concern. “One component of that is people became uncomfortable with the possibility of violence, and the appeal of the suburbs grew,” he says. “Social unrest solidified people’s view of the trend to work from home.”
“In a presidential year, it seems like the economy naturally backs up a little as we wait and see what the outcome of the election will be,” says Ashley. “No matter who you vote for, knowing who’s next will provide some direction,” even if it’s not the direction you hoped for.
Ashley agrees with Yun on the impact of social unrest, and he attests that Kansas City saw its fair share of it. But he also voices confidence in the messaging and handling of the situation by Mayor Quinton Lucas.
Outside forces aside, Ashley remains focused on the goal at hand—value creation. “Next year will be a swing year,” he says. “There continues to be a lot of money on the sidelines, and as conditions open up, the task remains to help our owners and investors place that money well. Once COVID-19 is under control and a vaccine is discovered, we can all get back to what we know how to do: manage, build, and sell real estate.”
Yes, COVID-19 affected all of us negatively, but as Chan states, it also “gave us all the opportunity to become better managers, challenge ourselves, and become better at what we do. As long as everyone does their part in keeping the virus under control, the outlook for the next year will be very positive indeed.”
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