The 'Return Of The City' Will Influence What's Next For CRE Markets
Even sectors like affordable housing that have done well during the pandemic will be affected by cities’ health.
The pandemic will continue to cause disruption in CRE markets as the economy recovers into 2021, according to a new analysis from Moody’s Analytics REIS, with a number of transitions affecting all property types—including retail, hotel, office, industrial and multifamily. But the story, the report notes, is a local one.
The analysis by economists David Salz and Thomas LaSalvia notes that the issue of where those transition properties are and how they’ll transition is still a question mark. Prices haven’t fallen enough to register real “transitions on any great scale,” they say, and transaction volume has increased in the past few months.
In the affordable housing sector—one of the best-performing asset classes of the pandemic and a subclass that has outperformed even high-flying multifamily—large metro areas have seen outstanding balances of Freddie Mac loans increase by 15% year-over-year since February 2020, and average occupancies have decreased by less than 1.5%. But of those loans with occupancy declines greater than 10%, the cities of Dallas, Chicago, New York, Raleigh-Durham, and Boston stand out, the report says. And overall, average occupancy declines in loans with a greater than 10% decrease are similar.
“Digging deeper, we consider that this analysis shows metros that have lost tenants due to job market stress and a slowdown in household formation,” Salz and LaSalvia write. “In fact, other than Dallas, the other four metros had year over year employment losses well above the national metro average of 4.8%, while household formation was below average for New York, Chicago, and Boston.”
Moving forward, the two expect that the stimulus and job growth will do their part to erase these occupancy drops, but structural changes will keep long-term unemployment elevated for a while.
Ultimately, the pair note, “the return of the city plays a part” in the analysis of what’s next for the CRE markets—and the degree to which recovery stays even will impact even sectors like affordable housing that have done well during the pandemic.