Taking Stock of the Post-Pandemic Net Lease Landscape

“The net lease market performed really, really well during the pandemic.”

This bit of good news was delivered early on in the keynote presentation given by Revathi Greenwood, global head of data and insights at Cushman and Wakefield, as GlobeSt.’s Net Lease Spring event kicked off (live!) at the New York Marriott Marquis on Thursday morning. She did emphasize, however, that there were still some miles to go before hopefully landing “somewhere north” of the 2018/2020 figures.

Greenwood’s talk, entitled “Thriving Through Times of Disruption: Driving Sustainable Growth in the NET LEASE Sector,” similarly tempered optimism with caution regarding inflation and the uneven property market recovery, while accentuating several positives coming out of a particularly brutal year. Here are ten takeaways:

1. “The economy is booming.”

Greenwood noted that in 2019, GDP grew at 2.3%. In 2020, it shrank by 2.4%. The economy lost 22 million jobs, three million of which were office-using jobs. At mid-year 2021, however, there are comparatively massive spikes in not only GDP but employment and wage growth, which she expects to stabilize somewhat in the coming year. Greenwood credited both unprecedented stimulus and consumer confidence thanks to saving during the pandemic for these spikes.

2. “Watch out for inflation.”

Greenwood said that inflationary pressures are noticeably developing, and acknowledged recent comments coming from the Federal Reserve about interest rate increases. She recommends to track these potential developments very closely. “I think we are relatively relaxed about inflation in the 2-3% mark, and if it goes over that, that’s where I think we start getting into dangerous territory,” she concluded.

3. Institutional investment is spiking.

Examining where people are putting their money, Greenwood noted that retail had shrunk during 2020. Office did as well, although that’s seeing a comeback now that pandemic restrictions are loosening up. But institutional investment is almost equal to where the private market currently is. “There’s a lot of institutional money chasing assets,” she said.

4. Working from home is a game-changer.

Pre-pandemic, the amount of people who worked from home was about 5%. Greenwood expects that number to increase twofold, to 10%, and that will pull back office demand a bit. She also said the office market lost close to 140 million square feet of demand during 2020 and 2021. What does this mean for office vacancy rates going forward? Greenwood believes the rate will peak at 18% because of the WFH trend, but as new jobs are gradually added that rate will come back down.

5. The Sunbelt cities are the migration champions.

Greenwood found that 67% of people would want to move if they worked from home full-time. She shared a recent Redfin study that sharpens the picture: One-third of people surveyed would move completely out of their present state, while one-third would move to the suburbs and the remaining third would stay where they are. So where are people moving? Looking at the last ten years compared to projecting the next ten years, nearly every city seeing increased migration is a Sunbelt market, with the exception of Seattle. Dallas tops the list, followed by Houston, Phoenix, Miami and Atlanta. The biggest losers in the migration are mostly Gateway market cities, like New York, Chicago, Los Angeles and Detroit. However, Greenwood pointed to Cleveland and Memphis as being two cities to watch for inbound migration.

6. Don’t weep for the Gateway cities just yet.

“The good news is that despite all this, businesses are not fleeing the Gateway cities,” said Greenwood. The historical average of total leasing percent in  Gateway cities has measured between 40 and 50 percent. In 2020 it languished at 42% but it’s inching up slowly. Also, Gateway city tour activity is increasing. Nationally it’s down 10%, but Greenwood said Chicago is up 40% and San Francisco is up about 25%. There are also isolated signs of improvement in the office leasing market, as Boston is already back to pre-pandemic levels.

7. But what does this mean for CBDs?

Central business districts are still going strong, according to Greenwood, although the effects of moves to the suburbs are starting to show. Suburb share of leasing has gone to 17%, while CBD has dropped to 30% from about 35% historical average, she said. Looking at year-over-year changes in vacancy, CBD vacancy lightened in places like Long Island and central New Jersey, while increasing in Buffalo and Las Vegas.

8. Retail, like Shrek, has layers.

Greenwood jokingly compared the retail sector to the famous movie ogre: “Outwardly ugly, but actually when you look closely, there are some redeeming qualities.” The all-around retail growth last year was at 6%, while e-commerce exploded at a whopping 40%. Retail vacancy rates have gone up, but Greenwood says it’s not at the same spike seen in office. A promising development is seeing restaurant sales overtaking grocery sales, going back to pre-pandemic levels. Greenwood says this signals a return of people looking for experiential retail.

9. New York City has lost its top spot.

Comparing the top ten markets for net lease transactions over the past three years to the past 12 months, New York City has fallen off the list. The market had been second only to Los Angeles, but it’s nowhere to be found in the recent top ten. Instead, Las Vegas makes an appearance, although farther down the list at number six.

10. What are the growth areas to watch?

Life sciences, says Greenwood, particularly in cities like Boston and New York, but also Austin, Seattle, and San Diego. She also said she felt “very bullish” about cybersecurity as a growth area.