Big Uptick of New Businesses May Not Pay Off for CRE

Vaccination rates are up while new Covid-19 cases have dropped far down from vertiginous winter heights, according to data from Johns Hopkins. That means growing hope for the country—and the businesses that keep the economy humming.

Along with those changes are new business openings, according to a study from Yelp. Normally, that should mean brighter days for commercial real estate. But government figures on an historical spike in new business formations suggest the real wave of new businesses will be small and unlikely to seek a traditional property lease in the near term.

First quarter tallies of new businesses added onto Yelp by owners or customers reached their highest levels in 12 months, “with restaurant and food business openings, as well as home, professional, local and auto service openings above Q1 2020 levels.” The hottest part of that segment focused on takeout or dining out, keeping in sync with Covid-19 concerns.

The number of openings was 146,486 total business openings was comparable to prior years and up 4% from the same period in 2019. Restaurant and food business openings were 12.4% of the new businesses—up 5% from the first quarter of 2020 but down 4% from the same time in 2019.

Professional, local, home and auto sectors were 79,332, or 54.1% of the 2021 total. The single largest sector was home services, at 48,592.

Except for North Dakota, every state saw at least some growth.

But a fuller look at new business activity comes through business formation statistics from the Census Bureau. Non-seasonally adjusted figures (preferably in this case because rapid change is difficult to predict and adjust for) show the volume of employer identification number (EIN) filings with the Internal Revenue Service:

The third quarter of 2020 saw an enormous jump, larger than any other since the oldest available such data, from 2004. The first quarter of 2021 surpassed even that. Remembering that correlation is not the same as causality, a connection between increased formations and pandemic impact does seem likely. People are uncertain about employment, even as job recovery continues.

Part of the EIN filings are business as usual. Every quarter companies create new business structures to manage mergers and acquisitions, development projects, investments, and other ventures. But as the data show, the baseline of activity is far below the peaks.

The difference is likely filings by people who start something on the side or finally use the impetus of uncertain times, and perhaps a job loss, to set out on their own. Some of those businesses will likely need commercial real estate. However, notice the difference between high-propensity filings—those for various reasons deemed likely to become businesses with a payroll—and low-propensity, which are expected to change the number of jobs. Many, if not most, of the latter are probably one-person shops that will work out of their homes or, perhaps, flexible office space.

While the news for the economy is good in many ways, commercial real estate may not see a big improvement as a result.