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National Association of Home Builders
Robert Dietz, Chief Economist
Though initially negatively affected by the first round of shutdowns during the spring, the housing market experienced a rebound followed by an outright expansion and record-breaking sentiment during the summer and fall. Due to low mortgage interest rates and a renewed focus on the importance of home during a public health crisis, the housing sector has been a bright spot for the economy in 2020. The NAHB/Wells Fargo measure of builder confidence has reached successive all-time highs over the past three months, and housing’s share of GDP has gained ground.
Benefiting from historically low interest rates, thin resale inventory and a changing geography of housing demand, single-family construction is now at its highest rate since the spring of 2007 and is expected to grow steadily over the next two years. However, multifamily construction is expected to decline in 2020 and 2021 before stabilizing in 2022, although apartment construction will see relative strength in lower-density markets with “missing middle” production expected to increase in low-cost markets without excess regulatory cost burdens.
The COVID-19 pandemic had many economic impacts, including changing housing preferences. The NAHB Home Building Geography Index (HBGI) found that residential construction activity has expanded at a more rapid pace in lower density markets, such as smaller cities and rural areas since the first quarter of 2020, and this suburban shift continues in the third quarter. This change is expected to continue at least on a partial basis in the post-vaccine economy as telecommuting persists.
Given that the residential construction sector entered the 2020 downturn underbuilt, additional construction activity is required to meet demographic demand. Currently, new home sales are outpacing actual construction starts by a historic margin as builders add to backlog. This imbalance between housing demand and supply could hamper future sales by driving up home prices and restraining affordability. Meanwhile, builders and remodelers continue to deal with affordability headwinds on the supply-side, including the cost and availability of building materials. Such cost increases could impede more robust construction growth as some home buyers and renters are priced out of the market.
International Council of Shopping Centers
Stephanie Cegielski, VP of Public Relations
It’s been a challenging year for retail and retail real estate: The pandemic has crippled consumer demand in many areas, forced many small businesses to close, and exacerbated long-term trends that are fundamentally changing the way we shop, live, and work. One in every four jobs in the American economy is retail-related; as businesses shuttered or modified their operations to slow the spread of the virus, many lost their jobs or faced immense economic strain.
We continue to highlight the urgent need for support for small businesses across the country as they deal with the devastating blow of the virus and a challenging economic climate. By some estimates, as many as three-quarters of the restaurants in the nation could shut down without more assistance. Many businesses are unable to pay rent, sending ripple effects through the economy and saddling lenders and property owners with their own economic risks. Retail sales fell for the second consecutive month in November, declining 1.1% as consumers tightened their budgets; similarly, ICSC’s latest economic survey found that 75% of U.S. adults are cutting back on spending. While we expect a successful holiday season and recent federal stimulus will help consumers and businesses alike, we have much more work to do.
Still, ours is a resilient and innovative sector. Our members have literally been deemed “essential” by governments and consumers alike, and they’ve stepped up when needed most: We’ve continued to provide goods and services, safely create a sense of community and togetherness, and form the backbone of America’s economy. We’ve advocated forcefully for relief from federal, state, and local elected officials, and worked hard to ensure that relief helps keep the sector humming.
Our hope is that as the nation works together to control the virus, vaccinate the population, and support those in need, Americans will redouble their spending at retail establishments and the sector will continue to adapt and thrive in the post-COVID era. Together, we can help the industry weather these challenges and emerge stronger on the other side.
National Association of Real Estate Investment Trusts
John Worth, Executive Vice President, Research and Investor Outreach
The performance of real estate sectors varied in 2020 depending on the level of face-to-face interaction with customers into the business models. Real estate that houses businesses that require in-person contact – like lodging/resorts, restaurants, retail, skilled nursing and senior living –experienced more significant weakening during the pandemic and face a longer, slower recovery in early 2021. Other property segments that don’t require face-to-face interaction, like data centers, cell towers and logistics facilities, recovered quickly from the initial shock of the pandemic last spring and have benefitted from a socially distanced, work-and-shop-from-home economy that has created strong demand for digital communications and e-commerce services.
The commercial real estate market, however, does have sources of strength that have softened the impact of the economic downturn and will continue to do so in 2021. One key source of resiliency unique to REITs is that nearly two-thirds of the REIT industry is comprised of sectors with little impact from social distancing.
REITs, which represent approximately 20% of the value of the broader investment-grade commercial real estate market, also entered the downturn with strong financial positions, defined by low leverage, long debt maturities, and high levels of liquidity on balance sheets. Other factors have helped soften the impact of the downturn in the broader commercial real estate market. A low level of construction as the industry entered the recession has helped limit the supply of new commercial space and buffer the rise of vacancies.
The most important factor for REITs and commercial real estate will be broad distribution of a COVID-19 vaccine and progress against the pandemic. Barring further setbacks in this fight, conditions will gradually return to normal as the year progresses.
There will continue to be wide variation across property sectors in 2021, and it may well be the mirror image of 2020. Those sectors that were most directly affected by reduced travel, business closures, and social distancing, including lodging/resorts, retail, and health care REITs, may have a more robust recovery in 2021. This reflects, however, the larger declines in 2020 that give them more potential for upside gains.
Looking beyond the immediate recovery, it will be important to distinguish between short-term or transitory effects of the pandemic versus long-term or permanent changes to commercial real estate markets. Although data are scarce, there are indications that economic activity tends to return to more normal conditions in countries where new cases of COVID-19 have fallen. There may also be, however, longer lasting changes to how commercial real estate is used. For example, teleconferencing and work-from-home may have long-lasting effects on office markets, as well as hotels, apartments, and single-family home rentals.
NAIOP, Commercial Real Estate Association
Jennifer LeFurgy, PhD, Vice President, Knowledge and Research
Commercial real estate has experienced uneven impacts since the pandemic and its associated shutdowns. Warehouse has performed exceptionally well due to the shift to e-commerce (online shopping, food and grocery delivery), while demand for retail and manufacturing space declined considerably.
The future for office remains uncertain, as remote work has lessened the need for office space. When return to work happens, the layout of offices will change, and more space will be afforded to employees for health and safety reasons. Long-term leases will keep office space buoyant in the near team, but it remains to be seen if centralized office space will be in demand. Employers could continue with remote work a few days a week or make use of satellite offices or coworking space. Demand for retail space will continue to see a decline and existing space will most likely be repurposed in markets that can support such a transition.
The construction sector, while being slowed by supply chain and workforce disruptions, efficiency losses attributable to social distancing, and market uncertainty, was not as seriously impacted in 2020 as many other sectors. It continued to support the economy during the downturn (this was due in part to construction workers being deemed essential employees) and comprised 21 percent of GDP in 2020. However, residential and infrastructure construction made up most of this contribution. Construction data for 2020 indicates that spending for office, industrial, warehouse and retail buildings totaled $93.8 billion, down $39.9 billion, or 29.8 percent, from the annual total for 2019.
Post-pandemic recovery will result in a different economy. NAIOP estimates full employment will not be achieved until mid-2022 and much of the jobs loss during 2020 will be permanent, with growth shifting to occupations that may have different wage and salary profiles as well as different geographic distributions.
National Apartment Association
Paula Munger, AVP, Industry Research & Analysis
The state of the rental housing industry is extremely fragmented, driven by financial conditions of renters. The majority of those who retained jobs and can work remotely continue to make full rent payments on time. Renters with high contact or lower-paying jobs are more likely to rent from individual owners or small, “mom-and-pop” owners who rely on monthly rent payments to pay mortgages, property taxes and cover costs to keep the property maintained. This segment of ownership has experienced rising delinquency rates, forcing them to dip into savings and put off much-needed repairs. Moody’s Analytics estimates that more than 11 million renters will owe close to $70 billion in missed rent payments by January. The typical delinquent renter will be 3.7 months behind on monthly rent of $1,250, or $4,625. Added to utilities, which are in arrears, the average household debt tops $6,000.
Longer term, the impacts of the COVID-19 crisis could fundamentally change ownership structures for rental housing, further exacerbating affordability issues. According to the data analytics company CoStar, more than one-third of 1-2-star properties with 5 or more units, sometimes referred to as “naturally occurring affordable housing,” are owned by individuals. Without the advantage of scale and other resources that larger companies benefit from, these owners are more susceptible to financial strain than other market segments and are less likely to be able to contend with increasing delinquencies.
A survey of low- and moderate-income housing providers conducted by the National Leased Housing Association in October found that 89 percent of owners had already experienced revenue declines averaging 12 percent. These individuals provide housing for residents who tend to be lower-wage earners, have been disproportionately impacted by the pandemic and who could see additional financial hardship without more fiscal stimulus. With the gap in rents of 4-5-star properties (newer, more amenity-rich) and 1-2-star properties averaging 57%, losses of this type of stock because of potential foreclosures could be detrimental to affordability in the United States.
American Land Title Association
Diane Tomb, Chief Executive Officer
Lockdown measures, business closures and travel stoppages at the end of the first quarter of 2020 following the onset of the COVID-19 pandemic brought the U.S. economy to a near halt. At the same time, with interest rates at an all-time low, refinancing was at an all-time high and many took advantage of the quarantine to buy new homes.
Title insurance and real estate settlement companies across the country persevered thanks in large part to the ability to transform their operations to serve consumers and keep everyone safe in a world of social distancing. Companies developed drive-through or curbside closings as a signing option, as well as digital options such as remote online notarization (RON), where available, to keep the pipeline going and handle the historic levels of business.
Due to the high mortgage activity, title insurance premium volume was up 17 percent ($13.2 billion) through the first nine months of 2020 when compared to the first three quarters of 2019.
According to an ALTA survey during the second quarter of 2020, 98 percent of respondents reported their offices remained open, and only 6 percent of those surveyed said they temporarily ceased operations at any of their business locations during since the beginning of the pandemic. Due to ALTA’s advocacy efforts, title and settlement companies were deemed “essential businesses” by the U.S. Department of Homeland Security and remained open to serve consumers looking to purchase real estate and refinance mortgages.
In 2021, a persistent housing shortage will likely keep home prices elevated, while new- and existing-home sales will continue to rise as record low mortgage rates and a work-from-home trend give housing markets strength. While the same refinance volume is not expected in 2021, analysts predict a surge in the purchase market that should help buoy another strong year for order volume. Some experts predict more home sales over the next 12 months than any other year since 2006, which will ultimately boost the title insurance and real estate settlement industry as well.
The push to provide digital closings on a broader scale will continue to grow. The use of remote online notarization (RON) increased 547 percent in 2020 when compared to 2019, according to a year-end survey ALTA conducted of vendors that offer this technology. This increase can be attributed to heightened demand for RON during the COVID-19 pandemic, coupled with the fact that 29 states have passed permanent laws authorizing the use of RON. The passage of a nationwide RON law would significantly aid the use of safe and secure digital transactions
In addition to improving the consumer experience, RON-enabled digital closings also will drive efficiencies for title and settlement companies, lenders, and the secondary market. Finding the right balance between convenience, security and risk are all key issues that the industry must consider as we build a road to smarter closings.
There remains a great deal of uncertainty about the pandemic and vaccine rollout. However, strong underlying fundamentals helped overcome the pandemic-driven spring slowdown and ultimately fueled a record-breaking year. The stage is set for another strong year in 2021.
Associated General Contractors of America
Ken Simonson, Chief Economist
Construction faces a highly diverse, but predominantly negative outlook in 2021. While homebuilders can expect a banner year, only a few nonresidential segments have positive prospects.
Both private and public nonresidential construction spending have been declining since last spring. Total nonresidential construction decreased in November for the fifth time in six months at a seasonally adjusted annual rate and was down nearly 6% from its peak in the first quarter of 2020.
Unfortunately, the declines are almost sure to continue for the next several months. Few new projects are being awarded, forcing contractors to lay off workers as projects begun before the pandemic hit wind down.
In a survey of more than 1300 nonresidential and multifamily construction firms that AGC of America released on January 7, only one-fourth of respondents reported their firms had won new projects or add-ons to existing work since the pandemic began. In contrast, more than three out of four (78%) reported that at least one project had been postponed or canceled.
Respondents, on balance, expect a smaller dollar volume of projects available to bid on in 2021 than 2020 in 13 out of 16 market segments. Respondents rated the outlook as especially dismal for retail, lodging, and private office construction. Prospects were also overwhelmingly negative for higher education work and public buildings. Optimism was expressed only regarding water and sewer projects, warehouses, and healthcare other than hospitals (such as clinics, testing facilities, and medical labs). (The survey did not ask separately about data centers or renewable energy projects; other indicators suggest these niches also have favorable prospects.)
Huge numbers of owners (potential construction clients)—whether private firms, investors and developers, universities and other institutions, or state and local governments—have experienced severe revenue losses, unbudgeted expenses, and uncertainty about future demand for facilities. As a result, it is likely that construction will not pick up until long after many other sectors have recovered.