4Q 2021 Economic Projections and Impact on Commercial Real Estate 

Posted by Blanchard and Calhoun on Wednesday, October 13th, 2021 at 10:03am

 

Q4 2021 Commercial Real Estate Market

by Alex Griffin | Investment Associate with Beman Group

Blanchard and Calhoun Real Estate Commercial

The Covid-19 pandemic created and exacerbated many economic headwinds in 2020. Business closures forced many employers to lay off workers or reduce hours, with unemployment hitting a pandemic high of 14.8% in April 2020. The federal government responded with multiple rounds of stimulus packages, including direct payments to taxpayers designed to boost spending. The Federal Reserve also reduced their Federal Funds Rate encouraging borrowing for investment and increased bond purchases after years of tapering. All of these measures were designed to keep the economy from completely sinking. 

Fast forward to late 2020 into 2021, post presidential election, and the unemployment rate has reduced to 5.4%. Businesses have reopened as vaccinations have been distributed, with 74% of the US adult population having received at least one dose. The government continues to distribute stimulus money and keep borrowing rates low, and many analysts expect this to continue into 2022. To an outside observer, a 5.4% unemployment rate, 6.5% GDP growth, and a stock market up 21% year-to-date would appear to signify a strong economy. However, there are some underlying concerns that will impact the remainder of 2021.


Covid-19 Cases Continue to Rise 

The first major concern for the remainder of 2021 is that confirmed cases of Covid-19 cases continue to rise, while vaccination numbers have stagnated. As of this writing, the seven day moving average for new cases is 147,030 per day, a high not seen since November 2020, prior to public vaccinations. Vaccine distribution peaked in early April 2020, when confirmed cases were averaging less than a third of the cases as of this writing. Vaccination rates have been increasing since early August, but at a slower pace than any other time in 2021. With most new cases being the more contagious Delta variant, public health officials are concerned that many states' low vaccination rates will cause resurges in the virus, leading to new economic shutdowns. If cases continue to rise without vaccination rates increasing, the economy could falter in the remainder of 2021. The big question is whether or not businesses will shut down and lay off workers, or require vaccinations from their employees and/or customers. 

 

Inflationary Concerns 

The second major concern for the remainder of 2021 is the inflation rate. In July 2021, the Consumer Price Index rose 5.4% over the previous 12 months, a high not seen in quite some time. If prices continue to rise faster than wages, then consumers cannot buy as many products or services as they used to, thereby slowing down the pace of economic growth. The Federal Reserve has an inflation target of 2%, and when inflation rises above that target, they typically respond by increasing borrowing rates to slow down an “overheated” economy. Their challenge now is how to combat inflation without pushing the economy into a recession at a time when many citizens need economic help due to the pandemic.


Why This Matters to Commercial Real Estate 

Commercial real estate is typically a good investment because it acts as a hedge against inflation; many leases have annual rental increases of 3%, so typically, rent grows faster than inflation. Now however, with inflation being higher, real rent increases to landlords are negative, so real estate returns are lower. Investors will want to keep their eye on inflation when negotiating leases. Second, with interest rates held low by the Federal Reserve, real estate prices have continued to rise, again hurting returns. When banks make borrowing easier, investors tend to pay more for properties. Finally, if businesses were to shut down again, landlords will have to negotiate with their tenants for rental deferments, or with their banks to renegotiate debt obligations. Commercial real estate remains an attractive investment, but investors will need to temper their expectations through the remainder of 2021.

 

 

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