CRE Struggles to Adapt to a K-Shaped Recovery

The lopsided nature of the K-shaped recovery continues to impact commercial real estate in varying ways. 

At its heart is the dichotomy between higher-paid workers, who are weathering the recession and lower-paid laborers that are struggling. 

“Individuals with less education were more than twice as likely to be out of work as college graduates,” according to Marcus & Millichap in a new research brief. “People without a bachelor’s degree are more likely to have been employed in lower-skilled roles that were disproportionately affected by stay-at-home orders.” 

Amazon is a bright spot as it hires workers to meet the surge in demand for delivery. However, the airline industry was permitted to begin layoffs on October 1, which could affect more than 30,000 employees, according to M&M. Disney will lay off a similar number of workers. 

“These and other job losses, months after the health crisis began, highlight how, for many businesses, things may get worse before they get better. Instead of one cohesive growth trend, the economy is following disparate paths, supporting the case for a K-shaped recovery,” the M&M report said.

M&M says the divergence in unemployment rates between low- and high-income workers has “notable implications” for commercial property. This trend affects all aspects of commercial real estate from multifamily to industrial, which is being bolstered by people who can pay for online products, to retail.

For instance, earlier this summer, Ryan Severino of JLL noted in a report that retailers and retail centers–especially the ones that cater to less-affluent households–may lag behind other commercial sectors in the K-shaped recovery. While demand for homeownership is surging, lower-income housing communities could also face problems. 

Similar dynamics are playing out in the apartment sector. Historically, the performance of Class C apartments tracks the unemployment rate, according to M&M. During COVID, that relationship hasn’t materialized. M&M speculates that expanded unemployment benefits and eviction moratoriums are the reasons for this divergence with past performance. But now unemployment support has ended. Without additional stimulus to support lower-wage workers, Class C housing could experience a significant disruption.

The concentration of job losses in sectors that often employ low-income workers is also playing a role. Namely, the accommodation and food services sectors experienced the most job losses of all sectors, losing over 3.2 million jobs from February through August, according to research from the National Multifamily Housing Council. The sector’s employment levels fell by 22.7% from February to August, the second most significant national decline after arts, entertainment and recreation, which slipped by 35.2%.

“Apartment residents made up 18% of all accommodation and food service employees in 2018,” according to the NMHC. “This sector had the highest share of its workforce living in apartments.”