Three 'R’s' of real estate and the economy: Reinvent, Recharge, Reignite

KCRAR Commercial hosted its annual commercial real estate forecast in a virtual format on Thursday, October 22.  Dr. Ted C. Jones, senior vice president-chief economist at Stewart Title Guaranty Company, offered his perspective of national developments in commercial real estate during the pandemic and his outlook for the future.

Jones discussed the three “R’s” of real estate and the economy:  reinvent, recharge and reignite.

Jones said that last year the real estate industry reinvented the way it did business; giving the examples of virtual tours, virtual online notarizations, the use of e-signatures to close transactions and the proliferation of the restaurant carry-out business.

Jones estimates that compared to 15 months ago, consumers have $2.2 trillion more in their bank accounts, thanks to stimulus money — but, that comes with a cost.

“We go back to March 2020, (when in the ) first time in history we saw both sides of the aisle in my lifetime move and say we’ve got to do something — and we did a massive amount of stimulus. in fact, so much we’re enjoying some of that appreciated inflation we’re seeing right now,” said Jones.

Jones said that as the country recovers from the pandemic, a re-ignition is taking place, and we are seeing a hot economy.

“Every time there is a change, we literally have winners and losers.  Last year, commercial real estate was a big loser.  But commercial real estate is coming back,” Jones said.

In the United States, total commercial real estate sales year to date is up 75 percent compared to last year, with apartments sales up 115 percent.  Industrial property sales haven’t done as well because nobody in industrial wants to sell right now, said Jones.  

Jones said the big winners last year and this year were multifamily and industrial properties.  The biggest losers have been hotels, retail and offices.

“We’ll see how they come back out.  But things are changing.  The great American reopening continues,”  he said.

The pandemic drove housing to its highest intrinsic value in history.  People have been spending more time in their homes, and it’s impacted our quality of life and our lifestyles, Jones said. And, the housing market is so hot because demand is outstripping supply.

Jones said that sales of apartments in the third quarter of this year were the highest in any quarter in United States history. From the beginning of the year through September, median apartment rents in the United States increased 16.4 percent.  In comparison, in the three years before the pandemic, apartment rents increased an average of 3.4 percent.

“That’s a five-fold factor increase.  Pretty amazing,” said Jones.

Jones said that low-interest rates have been really critical in our economic recovery, but he predicts that interest rates will increase, driving more people to the rental market.

Jones said that in 40 days during March and April 2020, the country lost every job that had been added in the previous 10 years; but, nationally almost 80 percent of those jobs have come back.  The Kansas City metro area fared better, he said, having recovered 91 percent of its lost jobs.

Jones predicts that artificial intelligence technology and robots are going to impact future demand for commercial real estate.  Citing a 2020 survey conducted by Jones, 43 percent of companies planned to reduce their workforce as a result of new technology.

“You don’t need as much office space.  You may need more industrial space because robots take up a lot of room,” he said.

Currently, the office vacancy rate in Kansas City is pretty close to the average historical rate of 16.3 percent.  Jones said the Kansas City office market is doing better than many other markets.

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This is part 2 of the KCRAR event held on October 22, 2021. To read the first article, click here.

Kansas City's strengths prime continued success

Jill McCarthy, senior vice president, corporate attraction, for the Kansas City Area Development Council (KCADC), discussed the Kansas City region’s economy and its strengths at the virtual annual commercial real estate forecast hosted by KCRAR Commercial on Thursday, October 22.

KCADC focuses on new business and talent attraction to the region, representing both sides of the state line and covering 18 counties and more than 50 cities.

“We market out the metro’s assets, whether that is a lifestyle, whether it is industry sectors, whether it is on the available property,” said McCarthy.

According to the most recent reported figures, McCarthy said the Kansas City metropolitan area stacks up favorably to the national numbers.

The national unemployment average stands at 6.7 percent, but in the Kansas City metropolitan area, that figure is 4.4 percent.

Leisure and hospitality this year locally saw gains of 21 to 22 percent, while nationally that gain was approximately 17 percent. Local gains in professional and business services outpaced national gains (6.4% to 5.6%), McCarthy said. 

McCarthy said Kansas City added nearly 6,000 manufacturing jobs, a gain of 7.4 percent, compared to a national gain of 3.3 percent. 

“And that really goes in line with some of the projects we saw last year that came into Kansas City—Melaleuca, Boxycharm, Dot’s Pretzels and Pretzels, Inc.  So we saw a lot in the manufacturing sector looking at Kansas City,” she said.

McCarthy said the region saw a few office successes, including one in cybersecurity and one in customer service.  

She said clients are trying to determine what size office they want or need.

“Even though most of our office projects are talking about a hybrid workforce, there are very few that are looking to set up new operations that will have everybody, all hands on deck, in the office.  But, they’re very concerned about space and about the quality of workflow for the employee,” said McCarthy.

Although the region gained $123 million in new payroll and added almost 3300 new jobs and nearly $900 million in capital investments last year, McCarthy said those numbers have not been reached this year yet.   Currently, the region stands at $73 million in new payroll and $237 million in capital investment.

McCarthy said that there are a couple of large data centers in the works, and each of these projects has the opportunity to be upwards of $200 million to $2 billion for each campus.  

“So that’s an extraordinary impact that I see on the horizon for 2022 in Kansas City,” she said.

KCADC projects that approximately 15 million SF of industrial space will come online in 2021, McCarthy said.

“One of the things that we pitch often to our clients is that Kansas City has this amazing entrepreneurial spirit.  It's kind of embedded in the way we work and the way we operate . . . And I think we’re really doers and innovators, and that bodes well for a lot of our core industries,” said McCarthy.  

McCarthy cited some of the many strengths of Kansas City.  Kansas City has the largest rail center by tonnage.  It has more foreign trade zone space than anywhere else in the United States.  It has great connectivity via its interstate highways and has five class one rail lines.  

Kansas City also has more than 660 food and beverage companies, ranking it number eight in the United States for food and beverage market growth over the past three years.  And, 56 percent of global animal health companies have a presence in the Kansas City region, McCarthy said.

In late September, Missouri Governor Mike Parson and Kansas Governor Laura Kelly together announced the launch of the National Security Crossroads, a KCADC initiative in the works for three years aimed at raising awareness of and growing national security missions in Kansas and Missouri.

“It's meant to really provide agility and resiliency and cross federal collaboration,” McCarthy said.

She said the automotive industry is huge in Kansas City, and the region is seeing a lot more activity on the e-vehicle side, whether it’s component battery manufacturing or semiconductor manufacturing.

The region’s future is bright, both next year and in the future, especially with a  new airport terminal on the way.

“We’re primed for success. I think our 2022 pipeline is just fantastic,” McCarthy said.

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A MWM CRE event Recap: (Note this article represents one of two articles from this event. Stay tuned next week to read the recap from Dr. Ted C. Jones on his perspective of national developments in commercial real estate during the pandemic and his outlook for the future.)

Jobs key to economic recovery, commercial real estate demand

Last week KCRAR Commercial hosted its annual commercial real estate forecast to discuss the local and national state of the commercial real estate market as well as projections for what lies ahead.

Dr. Ted Jones, senior vice president/chief economist at Stewart Title Guaranty Company; Abby Corbett, managing director/senior economist at CoStar Group; and Danielle Grimelli, market analyst at CoStar; joined moderator Max Wasserstrom, CFA, senior vice president at Block Real Estate Services for the virtual presentation.

Looking at the big picture, as challenging as 2020 has been, the news is not all unfavorable. Jones began by pointing out that Goldman Sachs predicts 2020 will see a total drop in GDP of 4.6%, but that GDP will be up by 6.2% in 2021.

“Folks, that is a recovery that most of us would have only dreamed of when we shut down the country last March and April,” Jones said.

“Do you want to know where the economy and the demand for commercial real estate is going? It’s all about jobs,” said Jones.

In 2020, the country on average lost every job that was created since 2010 when the country started to pull out of the last recession. However, Jones said jobs are coming back at a much faster pace than anticipated.

As we know, job losses have hit the leisure/hospitality segment of commercial real estate the hardest, losing one-half of all their industry-related jobs in March and April. Although some of these jobs have been recovered, Jones said we will not get all leisure and hospitality jobs back for probably 3 or 4 more years. Citing Business Travel News, he said hotels won’t get back to pre-pandemic occupancies until 2024 and room rates until 2025.

On a local level, Missouri lost 11.9% and Kansas lost 10% of jobs in the early months of the pandemic, but Missouri since has recovered 58.6% of those lost jobs and Kansas 52%. Jones said it will be a few years until all the jobs are recovered.

Jones said one of the major factors helping economic recovery is cheap energy. The oil industry has increased production by nearly 40%, but it has cut jobs by 20%, which is why the oil industry continues to survive.

“I guarantee you every business in America right now is doing this exact same thing. And that’s why I think it’s going to be a year or two or three before we get all these jobs back,” said Jones.

Jones said the pandemic has accelerated trends that were already underway.

“We were already buying e-commerce. We were already mitigating and minimizing the demand for Main Street retail store front properties. But look what we’ve done. We’ve fast forwarded this thing. We actually zoomed it up,” said Jones.

“We’re selling more stuff than any time in history. But, what we’re buying is different, and where we buy it is different,” he said.

In May, the CEO of OpenTable predicted that 25% of all restaurants would permanently close due to the pandemic, but the American Restaurant Association’s Independent Restaurant Coalition forecast in June said that 85% of independent restaurants (which comprise 70% of all restaurants) may permanently close by the end of 2020, which would constitute a loss of 59.5% of all restaurants.

Turning to commercial real estate sales, Jones noted that the decline in U.S. sales in the third quarter of 2020 was 67%, almost the same decline experienced in the third quarter of 2008 (66.6%). Kansas City, however, has fared better. In the third quarter of 2008, Kansas City saw a 68% drop in sales; whereas, in the third quarter of 2020, the drop was only 50%.

“Kansas City is doing quite well holding onto sales,” Jones said.

Jones noted that, in our lifetimes, borrowing has never been cheaper, but commercial real estate has never been more risky.

“We don’t know what it’s worth because we don’t know who is going to pay rents. We know that we need less office space, and we know we need less retail space,” said Jones.

Jones predicted that the country will be out of its recession by the third quarter of 2021.

“The good news is that we entered this downturn with the best wage growth in ten years.  What’s helping us out are low interest rates and cheap energy unless you are in an oil and gas producing area,” Jones said. 

“I think office and retail demand are forever reduced.  It’s a track we were already on.  I think industrial is forever up.  We’re going to build a lot more stuff.  I think we’re going to build a lot more stuff in Mexico, Canada and the U.S.,” he said. 

Corbett said that as a result of pandemic job losses, personal consumption spending plummeted by 19% before rebounding in the second quarter.  Even so, she said, consumers are spending approximately 3.4% less than pre-pandemic.  In addition, spending on services, the larger component of total expenditures, is still more than 7% below February levels. 

Total retail sales may have bounced back, said Corbett, but not all categories have fared well.  E-commerce has grown 21.6% since February, while electronics and appliance stores, clothing and accessories stores, gas stations and food services and drinking establishments have seen negative growth.

Corbett said CoStar predicts that the country will get back to the end of 2019 GDP output level by about the end of 2021.

“But, we’ll remain smaller than we would have without the pandemic for quite some time,” Corbett said.

With respect to the employment outlook, Corbett said jobs will come back over the next couple of years and will recover to end of 2019 levels by the end of 2022 and then flatten out.

“And also never getting back on a pre-pandemic growth path,” she said.

Corbett said that CoStar’s forecasts assume no new virus outbreaks and shutdowns in the fall and winter and a fiscal relief package of approximately $1.5 trillion for this year. 

“Both those assumptions as of right now, do not appear very likely so the forecast is then sort of tilted to the downside,” Corbett said.

She added that the third risk to the economic outlook is the high level of corporate debt. 

“There are still millions of highly indebted firms who are increasingly seeking to avoid defaults either by undercutting cost cutting or reducing head count and capital expenditures. . . . We’re seeing that in retail obviously with retailers reducing their footprints, closing stores.  We’re seeing it on the office side,”    Corbett said.

Grimelli, a market analyst for the Kansas City market, discussed the state of Kansas City’s economy and employment.  She said job losses were so extreme that it ate away at the area’s five year growth. 

With respect to the metro’s multifamily market, Grimelli noted that there is still quite a bit of supply underway which has been absorbed well, depending on where it’s located. Multifamily properties located in downtown Kansas City, the Plaza area and midtown are suffering.

“We’ve brought on the majority of inventory there in recent years so that’s contributing to higher vacancy rates along with the fact that the live-work-play [tenants] are confined to their homes.  So now we’ve seen this exodus from the urban core areas out to more spacious areas in the suburbs like Johnson County,” she said. 

Grimelli said the multifamily daily asking rents saw an almost immediate dip when the pandemic hit, but they’ve recovered pretty well across Kansas City. 

She predicts that there will be slow rent growth through the end of 2020, with rent losses pushed off into 2021. 

However, that rent growth recovery is dependent on “how we handle this pandemic, how we’re able to socially distance, whether we get a vaccine, how we get stimulus deployed,” Grimelli said.

Grimelli said that the metro area has seen a reduced demand for office space, but that trend was already under way when the pandemic hit.  And, sublet space on the market for the office sector has increased dramatically, Grimelli said.

“We already have seen rent losses in the office sector.  We expect those to continue going forward before we would start any sort of recovery,” she said.

Grimelli predicts that the Kansas City area will experience a severe downside going forward in the retail sector, including in retail rent growth.   There is very little retail space under construction, and Kansas City retail investment was already slowing when the pandemic hit. 

Kansas City’s industrial market has the strongest outlook, and Grimelli predicts a moderate upside.  Vacancies are rising slightly because there is some significant inventory underway.  

Grimelli also expects a slight decline in industrial rent growth heading into the end of 2020 and early 2021 before a strong turn around.