Pent Up Demand is Expected as COVID Vaccinations Take Place

Widespread COVID vaccinations could supercharge growth in both the US economy and in commercial real estate.

“There are a lot of strategic, real estate investing options on the table right now,” John Chang, SVP and director of research services from Marcus & Millichap, said in a recent video. “About 13% of the US population has had at least their first vaccination shot. So headway is being made. And when that number reaches about 75%, hopefully we will see some substantive changes.”

Chang expects 2021 to be a significant year of transition for the economy and CRE. “So investors will need to keep their eye on the horizon,” he says.

The level of growth potential could vary depending on the sector. In office, Chang says that once vaccine distribution hits a tipping point, companies will start making space decisions and absorption will likely increase. While it won’t come back right away, he expects to see some pent-up demand unleashed.

Office vacancies rose 240 basis points last year to 15.2%, which was its highest rate since 2010. While total absorption was negative 150 million square feet last year, it was not as bad as the 220 million square feet loss in the recession of 2001.

There may even be some pent-up demand in hard-hit retail. Chang thinks many struggling markets could be due for a strong comeback once vaccines reach most of the population.

“The dust hasn’t settled yet,” Chang says. “Many retailers have shuttered, but some of that space is not yet for lease. So there will likely be upward vacancy pressure for a little while. Second, despite the headlines, not all retail is doing badly.”

Grocery stores, home repair and discount stores have done well. “Vacancy challenges will be hit and miss depending on the type of retail center and the tenant mix,” Chang says.

Overall, the vacancy rate rose 70 basis points to 5.6% in 2020. Absorption was negative 26 million square feet, which was its worst performance in at least 20 years.

The bounce-back opportunities may not be as apparent in apartments and industrial, which have held up better than other sectors during the pandemic.

While the national average vacancy rate for apartments went up 20 basis points over the last year to 4.4% at the end of 2020, it has been 4.7% over the past five years. “Those were five good years,” Chang says. “But when you look up, get the pace of absorption on a trailing 12-month basis, you can see the demand has actually been strong.”

Industrial had a record-low vacancy in 2017 and 2018, with a five-year average of 5.2%. It jumped 50 basis points to 5.5% at the end of 2020. But last year’s absorption of 217 million square feet was still good, according to Chang.

“When compared to the previous growth cycles, investors are very upbeat about the industrial sector,” Chang says. “Demand is good, not great. But it will likely get a boost.”