R.O.I. Real State – Commercial Newsletter – January 2021
Posted on January 1, 2021
2020 was a challenging year for commercial real estate, although many of the effects from COVID-19 were accelerations of existing trends, as we noted in our Great Acceleration blog series. With the easing of restrictions—and the promise of achieving herd immunity through vaccinations and recovery from infections—R.O.I. Properties is optimistic that 2021 will see improvement in Greater Phoenix’s economic prospects. Here’s a brief overview of how we view the state of the various market sectors in the coming months:
Hospitality and Entertainment. These asset classes (along with retail) were the most immediately impacted by the pandemic. From the outset, we saw a significant increase in non-performing loans and actual and potential loan defaults for loans collateralized by hotels, motels, restaurants, theaters, gyms, and just about any element of travel, hospitality and entertainment. We believe there is significant pent-up demand for travel and all forms of entertainment, and we anticipate a strong bounce back as the year evolves. In particular, the popularity of working from anywhere (WFA) will be a benefit for travelers. Long-term hotels are seeing a wave of investor interest for repurposing into other uses, such as apartments and low-income housing.
Retail. The bricks-and-mortar segment of this asset class has further struggles ahead. Online ordering offers convenience and much broader options to satisfy consumers’ needs, at their fingertips. Locations that have embraced internet-based purchasing are in better shape than those with storefront-only. There are numerous success stories of internet-native retailers such as Warby Parker, Bonobos, and UNTUCKit, which are incorporating bricks-and-mortar locations into their strategies, as many consumers like to touch/feel before buying. This year is likely to see further repurposing of properties and mixed-use solutions, such as healthcare locations within neighborhood centers, special use facilities being incorporated into big-box locations, residential components incorporated into regional shopping centers, and co-working facilities incorporated into regional malls to drive retail and hospitality traffic.
Office. While the impact on office space was not immediate, as many decisions are on hold until lease renewal, we believe that this asset class will see long-term challenges. Businesses are utilizing and occupying offices differently. Less in-person presence is required, but employees and employers will still see a need for collaboration, perhaps on a rotational basis, with social distancing and hygiene requirements addressed. Garden offices seem to be the highly desirable “new normal” with less “touch” common areas, etc. We believe that many employers, whether tenants or owners, will reduce the size of their footprint over time, but include more highly amenitized state-of-the-art spaces within their offices.
Industrial. This asset class shows no signs of stopping in 2021. A lot of product is under construction, particularly along the 303 and I-10. One trend to watch is so-called last-mile industrial, which caters to the need to get closer in town—today’s consumer expects everything quickly. Amazon is setting the bar high here, with distribution centers throughout the Valley.
Multifamily. After going strong for several boom years, Phoenix leads the country in apartment construction. As we have cautioned previously in The Real State, the Greater Phoenix area has 20,000+/- units under construction and in the pipeline, and the market will eventually cool off. From R.O.I.’s perspective, Class A projects are the most overbuilt, but investors are still flowing in. Add it all up, and it’s difficult to predict what will happen.