3 minute read time
30 July 2020

Executive Summary

  • GDP contracted by 32.9 % on an annualized basis in Q2 2020 vs. expectations of a 34.7% decline.
  • On a quarter-over-quarter (i.e., non-annualized) basis, GDP shrank by 9.5%, which is perhaps a more meaningful measure given the uniqueness of the COVID-induced recession.
  • CBRE expects Q3 GDP to increase by 23.9% on an annualized basis (5.5% quarter-over-quarter).
  • Declines in output were broad across consumer and business categories, except for federal government consumption and expenditures where spending aided the economy.
  • CBRE expects commercial real estate’s recovery to lag that of the economy. The industrial and multifamily sectors will recover first, followed by office, retail and hotels over a longer time.

Commercial Real Estate Highlights

  • Office: The spread of COVID-19 severely impacted services and intellectual property that drive demand for office space. The office market likely will see several quarters of subdued activity until a clearer timeline for reopening appears and a vaccine is developed. This will allow occupiers to effectively plan reopening of workplaces and accurately forecast future needs. Lack of clarity around the durability of remote working and other flexible office solutions will also weigh on demand.
  • Retail: Personal consumption expenditures decreased by 34.6% on an annualized basis in Q2. While many retailers with weaker business models and balance sheets are struggling to survive, government support for consumers via enhanced unemployment benefits helped underpin the sector. Additionally, measures to provide liquidity to businesses helped some retailers survive. More federal aid may be needed for consumers and businesses alike to bolster the retail sector in the near term.
  • Industrial: Decreased consumer spending normally would impact some near-term demand for industrial space, but it appears the industrial real estate recovery is well underway. The sector has been buoyed by increased e-commerce demand and perhaps even some repatriation of supply chains impacting demand in select markets.
  • Multifamily: Sharp job losses across the country and sectors of the economy will weigh on household formation and affordability. Structural issues, such as housing shortages in many areas, and enhanced unemployment benefits have limited the erosion of fundamentals. There is some risk if policymakers do not maintain adequate support for the unemployed. Specialty sectors, including seniors housing, student housing and co-living, will continue to face impediments to demand until a vaccine is developed and distributed, but the longer-term outlook for all of these sectors remains strong.

The Bottom Line

Q2 recorded the biggest quarterly decline in GDP—down by 32.9% on an annualized basis—since records began in the 1940s. This shockingly bad number was in fact expected, given the uniqueness of the COVID-19 pandemic. For that reason, it should be noted that one-third of the U.S. economy did not disappear and that on a non-annualized quarterly basis, GDP fell by 9.5%. Under normal circumstances, GDP is measured on an annualized basis but under these abnormal circumstances, annualized numbers can be misleading.

CBRE expects annualized GDP growth to reach 23.9% in Q3 (5.5% on a quarterly basis), largely due to pent-up demand and unprecedented amounts of fiscal and monetary stimulus. For the full year, GDP is forecast to contract by 5.1%. A rebound in growth should continue through 2021, with GDP forecast to grow by 5.0% next year before moving back to longer-term growth trends.

The recovery in commercial real estate fundamentals will lag the economic rebound. This recovery will vary by property type, with industrial and multifamily fundamentals remaining resilient over the near term. The office recovery will not begin in earnest until occupiers can confidently assess timelines for fully reopening offices and there is further clarity on the durability of remote-working initiatives. This may coincide with the approval of a vaccine.

Sustainable recovery in retail and hotel fundamentals will also depend on a vaccine. Recent vaccine trials have been encouraging, and pharmaceutical companies appear optimistic that a vaccine may be approved before the end of the year.

In short, recovery for most commercial real estate sectors—aside from industrial and multifamily—will not start in earnest until 2021. A full recovery of office demand is not expected until late 2022, and not until 2024 for retail. Hotels should see a full recovery in demand by late 2023.

Figure 1: U.S. Economic Outlook - CBRE House View (Percentage Changes)

GDP Contracts by 32

Source: CBRE Research, July 2020.

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