The Lasting Impacts of COVID-19 on Real Estate – Part 1

March 10, 2021

Our last assessment of COVID’s impact on the real estate market came six months ago in September 2020, when memories of the spring’s lockdowns and stay-at-home orders were fresh in everyone’s minds. The number of US COVID cases had eased over the summer, and the national unemployment rate had halved from its 14.8% peak in April 2020 to 7.8% in September,[i] though it was still twice pre-pandemic levels. Uncertainty about the timing of future case spikes, vaccines rollouts, and the return to normalcy contributed to changing behavior by individuals and businesses in an effort to adapt and make the most of the circumstances. These adaptations had hefty and uneven implications for real estate markets, with many sectors taking significant hits while a select few benefited.

With the speed of vaccination progress improving and the nation recovering from a difficult winter that brought a spike in cases of both COVID and cabin fever, confidence in the economy appears to be on an upward path. While uncertainty still abounds, there is more consensus around what the “new normal” for real estate will look like.

Part 1 covers residential and office trends. Stay tuned for Part 2 on the retail, lodging, and industrial sectors.

Residential: Single-family home prices soar in COVID-refuge markets.

A well-reported trend nationally is the shift of residents from denser urban areas (particularly high-cost cities) to suburban, exurban, and even rural locations. Factors pushing residents out of cities include the perceived increased COVID risk, high housing costs and limited space, and the inability or hesitancy to take advantage of entertainment and recreational amenities, as well as non-pandemic related factors such as the aging of the large Millennial age cohort and the typical march to the suburbs that occurs as couples begin to start families. Meanwhile, the lure of substantially lower housing costs (and historically low interest rates), access to wide, open spaces and the great outdoors, and the new ability to work-from-anywhere for many has propelled home sales in small rural areas with high quality-of-place amenities, or “Zoom towns,” as they have come to be known.[ii]

Heightened demand for for-sale homes in lower-density locations has interacted with reduced inventory to drive up home prices. Supply has decreased due to a housing production shortfall, which existed pre-pandemic and has been exacerbated by construction delays, as well as fewer homeowners putting their homes up for sale, particularly in “COVID-refuge” markets. Nationally, Home Price Appreciation (HPA) was up 12.1% in January, year-over-year.[iii]

On the rental side, multifamily occupancy has generally held steady due in part to the eviction moratorium (set to expire at the end of March 2021). Nationally, asking and effective rents declined in 2020 as landlords made concessions to keep units filled. Percentage declines reached double digits in high-cost coastal markets from which renters able to work remotely fled in droves. As a result there has been increased development activity of multifamily units in suburban markets.

Unemployment remains high in low-wage sectors of the economy most reliant on in-person interaction: accommodations, food service, and retail. Eight million Americans are behind on rent or mortgage payments, with one third of these facing eviction or foreclosure in 2021.[iv] This could mean a wave of newly vacant units coming on the market, though it may not make much of a dent in the inventory drought.[v]

Office: Decisions on hold for now as tenants consider the future of work-from-home.

The office sector remains in a holding pattern as tenants continue to delay decisions to return to the office. Many firms have no concrete plans to return to offices until mid-2021 or 2022. In many cases, tenants with expiring leases have opted to sign short-term extensions and delay a more permanent decision. Opinions of work-from-home have proven mixed, as tenants weigh the benefits of reduced real estate costs against the costs of reduced employee interaction. Nationally, negative absorption has been substantial, with annual losses in leased-up space surpassing 75 million square feet.[vi] Sublet space availability is also on the rise, as tenants continue to rethink space needs.

The pace of office leasing activity in 2021 is expected to remain sluggish. While there has been a modest rebound from the low point in spring of 2020, office leasing activity as of Q4 2020 remained at just 56% of prior year volume. Additionally, the bulk of activity has been focused on lease renewals, rather than new leases as tenants postpone decisions on space commitments.[vii]

The early consensus on office space demand is that it may never return to pre-pandemic levels. Remote work is here to stay, and it will be most common as part of a hybrid model where workers are expected at the office fewer than five days per week. This means office utilization footprints will shrink substantially as desk-sharing becomes the norm (with full sanitization between users, of course). Employees will need more “elbow room” when they are in the office, but fewer employees will be in offices at any given time.

As a result, the quality, amenities, and location of office space will become ever more critical. This trend was readily apparent even pre-pandemic in which tenants sought highly amenitized space in interesting neighborhoods, in proximity to transportation options, and close to off-site eating and entertainment options. It may take some time before workers are comfortable again in denser, more walkable environments, but it is expected that these preferences will be taken up again post-pandemic. While ideal for maintaining social distance, isolated or poorly amenitized office parks offer minimal allure when a worker’s alternative and preference may be to simply work from home.

The expected permanent shift to a hybrid and or completely remote model for office workers could also make more enduring the shift toward farther-flung living. When a worker only has to commute a few times a week, living farther from the office is a more manageable proposition.