Executives Expect Office Recovery To Be in Full Swing By Labor Day
The reopening of the United States economy as the coronavirus vaccination rate increases is proving to be a much-needed shot in the arm for large commercial real estate brokerages.
Riding a wave of optimism as cases fall and deal activity picks up, the six largest publicly traded brokerages are predicting that most of their own employees and those of their tenant and building owner clients will be back to their offices by early September, and some much sooner.
CBRE Group, JLL, Colliers International, Newmark, Cushman & Wakefield and Marcus & Millichap are betting on a surge in new deal activity this year as almost a third of the U.S. population is inoculated. This brokerage response, announced during their first-quarter earnings reports, reflects a commercial real estate industry benefiting from a pickup in dealmaking, which essentially came to a halt almost 14 months ago, Morningstar analyst Kevin Brown told CoStar News.
“We’re increasingly seeing evidence of a broad-based recovery in the commercial real estate sector as mass vaccination develops herd immunity in the public and the end of the pandemic appears to be in sight,” Brown said.
The improving vaccination rate has created opportunities for more social interaction, leading many of the sectors that suffered during lockdown or stretches of limited capacity to open again. The return to offices is expected to bring workers back to downtowns, where they may shop, dine and live in bigger numbers than the past year. More broadly, theme parks, movie theaters and gyms are opening again or increasing capacity and expect pent-up demand to draw in even more customers.
For brokerages, that activity involving commercial property signals an easing of more than a year of upheaval since the onset of the pandemic that caused either record or near-record declines in revenue for most firms.
Most companies reported their highest revenue and profits of the past year for the first quarter, historically a slower period for real estate deals. CBRE, for instance, said it expects to have its best earnings per share in its history this year, reflecting the broader economy.
“Businesses are now increasingly more confident,” Newmark CEO Barry Gosin told analysts on the brokerage’s earnings call. “Companies have increased their utilization of space and are making long-term commitments across all sectors.”
Big challenges still lie ahead. Labor Department data on Friday showed that the United States added 266,000 jobs last month, compared to the roughly 1 million that economists had forecast, raising questions whether the strength of the recovery isn’t as straightforward as hoped or if the new data wasn’t giving a true picture of the longer term recovery. And nearly 85% of respondents to law firm DLA Piper’s latest State of the Market Survey this year anticipate it may take at least two years for office building vacancy to return to pre-pandemic levels, and almost half said it could take more than three years.
Yet, even so, almost two-thirds of those surveyed said that 75% of office workers would be back in their offices full-time within a year, indicating expectations of an improving situation in the industry.
“Bullishness in commercial real estate has returned to pre-COVID-19 levels as 74% of respondents feel optimistic about the market over the next 12 months, matching the confidence in the 2019 survey,” according to DLA Piper.
Best Leasing of Pandemic
According to CoStar data, first-quarter office leasing picked up slightly to 77 million square feet in the United States, the highest level since the onset of the pandemic.
The availability of office sublease space, however, set new records, eclipsing 200 million square feet in the first quarter for a total increase of 80 million square feet since the start of 2020.
By contrast, logistics and other companies were expected to lease a total of 300 million square feet once all the deals are tallied, CoStar said.
“Industrial brokers, tenants and landlords were as busy as ever in the first quarter with leasing at historic highs,” CoStar said in its first-quarter national industrial market report.
Despite the generally good news, brokerage executives caution that the pace of the recovery will vary across various property types and parts of the country rebound at different rates.
“There’s particular optimism for the second half of the year, but the recovery will be uneven and staggered across geographies,” JLL CFO Christian Ulbrich said during a conference call.
Most firms cited industrial and multifamily properties, and niches such as life science and data centers, as driving the increase in deal activity.
Offices and retail lagged early in the year, but executives see those sectors recovering too.
“We expect continued improvement in office leasing, particularly in the second half of the year,” Newmark CFO Mike Rispoli said.
