IRR forecast finds bright spots in U.S. commercial real estate market

Businessman uses a crystal ball
The expected turnaround will have a positive impact across the commercial real estate market—including hospitality. Photo credit: turk_stock_photographer / iStock / Getty Images Plus

Integra Realty Resources’ "Viewpoint 2021" publication suggests market watchers are optimistic about a midyear economic turnaround that will have a positive impact across the commercial real estate market—including hospitality.

“Here we are, one year later,” said Anthony M. Graziano, CEO of Integra Realty Resources. “The greatest peril the world has seen in more than 80 years has shattered U.S. small businesses, along with our hospitality and retail sectors. In less than nine months, the stock market has confounded the bears, while most local housing markets across the nation posted their best close on volume and price gains in years. The vulture real estate funds remain on the sidelines, waiting for deals that have yet to materialize. Despite the economic uncertainty and market volatility, bright spots remain across the real estate landscape, and we remain cautiously optimistic as we begin the new year.”

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As in previous years, the report was produced in partnership with veteran commercial real estate economist Hugh F. Kelly, who adds, “Following 2020, it is fairly easy to predict that 2021 is bound to be better. The new vaccines mean real hope for improved public health conditions supporting economic revival. However, the winter viral surge will leave economic scars. Washington gridlock has raised risks of a ‘W’ recession, constraining early 2021 growth. So, while readers will see there are many reasons for optimism, there are also many reasons for caution as hopeful eyes look towards a midyear economic recovery.”

National Highlights

The report suggested a swift return to 2019’s economy would be unlikely, with real gross domestic product still $670 billion off the pre-COVID peak. A return to the previous real GDP peak is projected for the first quarter of 2022 at the earliest or second quarter 2023 at the latest. Full jobs recovery, meanwhile, probably will not happen until September 2024, at best, and October 2026, at worst.

Cap rates for real estate and commercial property mortgage rates have remained stable, according to the report. With commercial property transactions down 50 percent year over year, risk-adjusted returns are high and will remain that way into 2021. Interest rates are likely to remain low through 2023 or even 2024.

Monetary policy will keep the “sluice gates of capital” wide open, the report claimed, bringing an optimistic air to private sector capital markets both on the equity and the debt side.

Hospitality

IRR does not anticipate a return to prepandemic hospitality metrics until early 2024 due to decreased demand. The top markets for occupancy are Phoenix; Atlanta; Norfolk/Virginia Beach, Va.; Los Angeles/Long Beach; San Diego; and Tampa/St. Petersburg, Fla. The hardest hit states were Hawaii (-65.2 percent), followed by Illinois, Massachusetts, New York (-49.1 percent), California and Florida.

Operators are placing emphasis on sanitation/cleaning protocols, increased customer service and digital check-ins. Due to limited capacities, daily operations are changing and operators are looking for alternative sources of guests as they repurpose underutilized spaces.

Sellers are finding new, nontraditional buyer pools, as cities and counties are purchasing underperforming hotels for transitional and low-income housing requirements.

As the U.S. exits the current pandemic, major mergers and acquisitions activity is anticipated among the "Big 6" hotel companies, according to the report.