The U.S. economy was wrought by the global pandemic and rallied by a subsequent rebound. Describing 2020 as a turbulent year would be an understatement. Recent key indicators and budding trends offer insight into what the commercial real estate outlook may look like in 2021.
ECONOMIC GROWTH & GDP
The economy entered 2020 on a positive note with a prolonged, albeit slowing, period of expansion reflected in annualized real GDP growth of 2.2% in 2019. A similar level of growth was anticipated for 2020.
The global economic and health crisis caused by the COVID-19 pandemic drove the economy into sharp contraction in the first half of 2020. As the potential impact of the virus first became apparent, the U.S. economy contracted by a 5% annualized rate in Q1 2020. The full impact of the pandemic was felt in Q2 when the combination of stay-in-place orders and business closures resulted in an unprecedented record 32.9% drop in annualized GDP growth – more than three times larger than the previous record quarterly contraction.
While there was a record rebound in GDP of annualized 33.4% in Q3 2020 – recouping two-thirds of the COVID output loss – the economy remains smaller than at the end of 2019. Putting this into context, the pandemic has caused a cumulative 10.1% contraction in the U.S. economy in 2020 to date. This is lower than both the 26.3% cumulative GDP decline that occurred in the Great Recession of 1929 and the drop of 13.5% in 1946 that followed the end of World War II.
Looking ahead, the health crisis should continue to determine the path for the economy. In Q4 2020, GDP growth, as measured by Consensus Forecasts, is projected to slow to 4.2%, resulting in a growth of negative 3.6% for 2020 overall. GDP growth forecasts for 2021 have been downgraded in recent weeks to around 4%, with the strongest expansion likely occurring in the second half of the year.
NON-CBD GROWTH AND NON-TRADITIONAL OFFICE SUPPLY
A theme of 2020, and very much tied in to the “Work from Anywhere” trend, there will be significant growth of flexible workspace outside of central business districts.
The depth and quality of flexible workspace supply outside of downtown locations is already causing a supply pinch in some markets. As occupiers continue to seek a range of geographic locations to solve for a distributed workforce, there is a substantial deficit of supply in suburban areas, secondary cities, commuter towns and emerging markets.
2021 will be the year that non-CBD flexible workspace supply increases dramatically. This supply will come from both existing operators and new entrants. Additionally, some of this supply may be delivered by repositioned retail and hotel assets.
Particularly in the Greater Los Angeles area, there are currently 4.4 million square feet of new major office projects under construction, with 67.5% of this concentrated in West Los Angeles. Market conditions with this new incoming supply will be determined by the success of the mass COVID vaccine rollout, which is now within sight.
Following a mid-year rebound, consumer confidence has stalled in Q4 2020 to date. Retail sales fell by 0.1% in October and 1.1% in November. Black Friday sales were somewhat subdued this year, and there is the possibility that holiday sales may follow with renewed pandemic restrictions weighing on the economy.
Barring the first quarter, the outlook for 2021 is more promising. The combination of vaccine rollout, high savings ratios, and another round of stimulus checks have the potential to drive up consumer spending. The December Consensus Forecasts survey of economic forecasts projects that personal consumption will grow by 4.6% in 2021 following a 3.8% contraction in 2020.
There are variations within this overall picture with only food stores, building supplies and online retailing currently showing rising sales volumes. Clothing purchases remain strongly impacted, dropping by 6.8% in November, along with big-ticket items such as cars, furniture and electronics. Spending at bars and restaurants fell by a further 4% in November. Colder weather and restrictions on indoor dining look set to exacerbate this trend over the winter months.
INDUSTRIAL REMAINS SOLID
The U.S. industrial market was the strongest real estate sector in 2020, and that is not expected to change in 2021. December economic indicators were a mixed bag, which should continue to slow the rate of growth in the first quarter. In December, the economy lost 140,000 jobs, breaking a seven-month streak of positive job growth since losing 20+ million jobs in April that pushed the unemployment rate to 14.7%. The unemployment rate remained unchanged from November at 6.7%. Most of December’s employment losses occurred in leisure and hospitality, private education, and government, yet the industrial sector employment rose in construction (+51,000), transportation and warehousing (+47,000) and manufacturing (+38,000). While these December gains are a positive sign toward recovery, each category remains below February levels.
Particularly, in Greater Los Angeles, e-commerce continues to dominate the demand for industrial space. Amazon committed to more than 9 million square feet throughout the region in 2020, bringing its total industrial footprint to 29 million. The Ports of Los Angeles and Long Beach recorded a significant drop in volume during the first half of 2020. A second half surge due to the economy slowly reopening and holiday shopping set new records for container traffic. The Port of Los Angeles reported 94% more traffic the week before Christmas than in 2019.
Manufacturing production closed out the year on a high note, growing for the seventh consecutive month, according to the Institute for Supply Chain Management’s Production Manufacturing Index (PMI). December PMI registered 60.7, which is approximately 3% above November’s reading of 57.5. This represents the highest PMI reading for 2020, and December’s PMI is about 8% higher than the 12-month average of 52.5. ISM also reported that 16 of the 18 manufacturing sectors it tracks saw growth in December. The only two industries that contracted were printing and related support activities and nonmetallic mineral products.
The outlook for 2021 remains optimistic, yet the increasing tensions between the U.S. and China and domestic political strains pose concerns for 2021. However, sustained industrial demand should persist as continued growth in e-commerce will fuel the sector in the coming year.
Stephen Newbold (Director of National Office Research); Francesco De Camilli (Vice President, Flexible Workplace); Amanda Ortiz (Director, National Industrial Research); and Matt Nelson (Senior Research Director) are all experts at
Colliers. Learn more at www2.colliers.com.
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