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PerspectiveUNIT
ED
STATES
I N S I D EVaccines have arrived as the economy struggles to get back on track.
COVID-19 has amplified demographic and technology trends in the U.S.
Large differences in sector performance but CRE remains attractive overall.
Rising optimism as the post-COVID world appears on the horizon
CONTENTS3 EXECUTIVE
SUMMARYA post-COVID world on the horizon
4 ELECTIONIMPLICATIONSLooking ahead after a tumultuous election
6 COVID UPDATEMoving past the virus peak
15 INDUSTRIAL/RETAILCOVID-19 drives changes in the retail & industrial sectors
18 OFFICEOffice faces challenges, flexibility will define its future
21 2021 SECTOR OUTLOOKSSignificant bifurcation with industrial holding a strong lead
9 ECONOMYWhite collar workers are weathering the pandemic well
11 INVESTMENTLANDSCAPESeeking opportunity in new markets
13 APARTMENTClass A rent collections will remain strong
U.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKU.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKA POST-COVID WORLD ON THE HORIZONEXECUTIVE SUMMARY
• The new year brings cause for optimism,with COVID-19 vaccine distribution underwayand anticipation of a post-COVID world in thesecond half of 2021. Political and socialtensions are high, but the country is movingforward. The Biden administration hasproposed the $1.9 trillion American RescuePlan aimed at supporting the economy andstimulating recovery.
• COVID-19 will remain the top issue in thecoming months. New cases are still extremelyhigh but trended sharply lower in January. Caselevels have led to new restrictions andeconomic activity has been impacted. Retailsales fell in the last three months of 2020 andemployment declined in December after sevenmonths of gains.
• With two vaccines approved for use andthree more in late-stage trials the likelihood ofsignificant vaccine coverage by this summer is
rising. We expect health officials will improve on what has thus far been a slow and disorderly vaccine rollout. The primary downside risk related to the virus is the arrival of new strains. Early indications are that the efficacy of vaccines remains largely intact against these variants.
• Headway has been made towardsrecovery, but millions of Americans have leftthe labor force. The underlying story has beenbifurcated outcomes both geographically andamong the workforce. White collar workerswere relatively insulated from the worst of therecession, while lower skilled workers wereimpacted disproportionately and continue toface bleak job prospects.
• The repercussions for commercial realestate have been significant. Retail has been further impaired, and many office markets are struggling as workers stay home and firms
revisit their space use strategies. Densely populated urban centers like New York and San Francisco have seen an outflow of population.
• Lockdowns precipitated a dramatic shiftto ecommerce spending, enhancing theindustrial sector’s recent outperformance. Theapartment sector has generally held up well, butnew urban high-rise supply is being met withtepid demand. More affordable apartmentcommunities face rising risks given theeconomic hardships of lower income renters.
• The low-yield environment and need forportfolio rebalancing will drive capital towardscommercial real estate. Investors will seek outopportunities in new geographic areas andmany will target alternative subtypes that haveproven more resilient to the recession or thosewith outsized growth prospects. These willinclude cold storage, medical office, and lifescience.
• We expect major U.S. cities to bounceback, with their unrivaled amenities, socialconnection, and ability to deliver large amountsof talent to a central location. Carefulsubmarket and asset selection will yieldopportunities in these markets. But on themargin demographic trends will shift further infavor of secondary and tertiary markets.
• The past year has been one of historicpolitical, economic, and social challenges.The country has overcome a tumultuouselection, adapted to severe economicdisruptions, and stood among the leaders in theglobal race for a vaccine. The future looks morecertain with COVID-19 inoculations underway.Commercial properties have performed well inthe face of severe economic headwinds andfundamentals should rebound as the economyrecovers.
We expect major U.S. cities to bounce back, with their unrivaled amenities, social connection, and ability to deliver large amounts of talent to a central location.
3
ELECTION IMPLICATIONS
LOOKING AHEAD AFTER A TUMULTUOUS ELECTION
PerspectiveUNIT
ED
STATES
U.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKU.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKLOOKING AHEAD AFTER A TUMULTUOUS ELECTIONU.S. ELECTION IMPLICATIONS
§ The task for President Biden is an immenseone: heal cultural and political divides, stampout the pandemic, and reinvigorate a stalledeconomy. His administration will begin with thebenefit of unified government, but it lacks asufficient majority in the senate to advancemajor legislation without bipartisan support.
§ Only time will tell exactly what agenda theBiden administration pursues and successfullyimplements. But in terms of potential impact onthe economy and commercial real estate wesee some key areas of influence that companiesand investors will try to plan around.
COVID-19: Plans have been announced for 100 million shots in the first 100 days of the new administration. Success here is key to getting the economy back on track in 2021. Emerging virus strains represent a downside risk that must be carefully monitored.
Stimulus & Infrastructure: The $1.9 trillion American Rescue Plan has been proposed, on top of December’s $900 billion stimulus bill. The plan includes enhanced checks to households and the unemployed. It would also bring more aid to struggling state and local governments and extend the eviction moratorium through March. Longer-term spending plans could bring much anticipated infrastructure investment to support more sustainable growth.
Immigration & DACA: It is likely Biden will put his support behind DACA and adopt a more open immigration policy. Parts of the country that rely on foreign-born workers and international students to help drive their economies could see a lift.
Climate Change & Energy: Executive orders have already been signed to cancel the permit for the Keystone XL Pipeline, suspend new drilling leases on federal land, and reenter the Paris Climate Agreement. We expect regional impacts as the petroleum and clean energy economies move in opposite directions.
Big Tech & Anti-Trust: The exponential growth, business tactics, and content policies of Big Tech will be under a microscope in the months ahead. These firms have been crucial drivers of economic growth and real estate demand in many metro areas. Regulatory actions could disrupt this trend.
Trade & Foreign Policy: Biden’s foreign policy stances may calm allies and enemies alike, but the risk of flare-ups, with Iran, North Korea, China, and/or Russia will persist. More predictable trade policies may encourage business investment and commerce.
Tax Policy: During the campaign Biden had signaled a desire to repeal Trump’s 2017 tax law and specifically end the cap on state and local tax (SALT) deductions. The potential exists that taxes will increase for businesses and wealthy households, but high tax states could derive some benefit from a repeal of the SALT cap.
§ COVID-19 is a reminder that the business cycleis often driven by factors beyond the politicalagenda of whichever party leads government.Power has transferred to a new administration,but their agenda will not be implementedwithout challenge and exogenous events maydictate what actually gets done.
§ Real estate investments in primary marketscould gain an edge in the coming years as thesemetros stand to benefit disproportionately fromanticipated changes to immigration and taxpolicies. A stronger focus on state and localgovernment support should also be a boon tomajor cities.
5
COVID UPDATE
MOVING PAST THE VIRUS PEAK
PerspectiveUNIT
ED
STATES
2021
U.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKBENTALLGREENOAK
7
MOVING PAST THE VIRUS PEAK
§ Recent COVID-19 cases are extremelyhigh, but the trend has been favorable. Atour last check before publication U.S. caseswere running just over 50 per 100,000people per day. Cases peaked at around 76per 100,000 per day in early January.
§ U.S. cases are roughly on a par with thosein the U.K. where renewed lockdownorders have spurred a decline in cases.
§ New cases in Canada, France, Germany,Italy, and Japan are well below the U.S. rate. However, Spain has seen cases rise at an alarming rate to almost match the U.S. peak.
§ Bringing the virus under control will be keyto the economic and real estate marketrecovery. The level of new virus infectionsposes a real threat to recovery as governorsgrapple with how quickly to easerestrictions.
§ COVID deaths in the U.S. have noweclipsed 400,000 and fears are rising aboutmore virulent strains of the illness.
§ Vaccination is a crucial part of the plan toreopen. The Pfizer and Moderna vaccinesare being administered and the Johnson &Johnson vaccine could be approved soon.
§ Concerns are high about the efficacy ofvaccines in protecting against new strainsof the virus. Reports suggest thatModerna’s vaccine is effective against thenew strain found in the United Kingdom,but that efficacy might be diminishedagainst the strain recently found in SouthAfrica. The firm is considering developmentof a booster shot.
§ We have confidence that vaccine rolloutwill improve in the near term, but if new virus mutations are resistant to the vaccines, we could see the economic recovery stall.
COVID-19 UPDATE
0
10
20
30
40
50
60
70
80
90
Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21
Canada France
Germany Italy
Japan Spain
United States United Kingdom
CASE LEVELS STARTING TO TREND LOWER IN U.S.DAILY COVID CASES PER 100,000 PEOPLE (7-DAY MA)
Source: Johns Hopkins University, U.S. Census Bureau, World Bank, BGO Research
7
U.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKBENTALLGREENOAK
-24%
-20%
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
20%
24%
-12,000
-10,000
-8,000
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
Austin
Salt L
ake C
ity
Phoen
ix
Dallas
- Fort
Worth
Norfolk
Atlanta
Denve
r
Was
hingto
n, DC
Nashv
i lle
Houston
Baltim
oreM
iami
Charlott
e
Durham
United S
tates
San Jo
se
Raleigh
Minn
eapo
lis
Riversi
de
Portland
San D
iego
Philade
lphia
Seatt
le
Chicago
Pittsb
urgh
West
Palm Bea
ch
Fort La
uderda
le
Orang
e County
Los A
ngele
s
Oakland
San Fr
ancis
co
Orland
o
Boston
Las V
egas
New York
9/30/20 to 1/23/21
5/31/20 to 9/30/20
5/31/2020
Peak to Trough
Trough to 11/30/20
Net Change
Miami13,100
§ COVID cases and economic restrictions varygreatly across the U.S. Stay at home orders orcurfews are still in place in Ohio and NorthCarolina. Stay at home advisories are in effectin California, New Mexico, Wisconsin, andKentucky. All other states have no stay-at-home restrictions, but many do haverestrictions on businesses and most havemandatory mask policies.
§ There is not always a clear relationshipbetween local government restrictions, COVIDcases, and job losses. Restrictions are lower inTennessee and Florida and cases are high inNashville and Miami, but employmentperformance has been stronger. Masks aremandatory in California and Los Angeles andRiverside have very high infection rates andlarger job losses than the nation overall.
§ Industry concentration frequently explainsemployment performance during the pandemic.Exposure to tourism and leisure and hospitalityjobs characterize several underperformingeconomies, including Orlando, Boston, LasVegas, and New York.
§ Population density and the presence of largeeducation and healthcare institutions seems tobe a factor in job losses as well. Boston and
New York are exporters of education and healthcare and as such the pandemic has significantly impaired their economies. These metros should rebound as the virus fades.
COVID-19 UPDATE
LARGE DIVERGENCE IN METRO EMPLOYMENT PERFORMANCE
EMPLOYMENT PERFORMANCE ONLY LOOSELY CORRELATED WITH INTENSITY OF COVID CASESCOVID CASES PER 100,000 PEOPLE TOTAL EMPLOYMENT CHANGE AS % OF 2020 PEAK LEVEL
Source: U.S. Bureau of Labor Statistics, Johns Hopkins University, BGO Research
8
ECONOMY
WHITE COLLAR WORKERS ARE WEATHERING THE PANDEMIC WELL
PerspectiveUNIT
ED
STATES
U.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKBENTALLGREENOAK
10
WHITE COLLAR WORKERS ARE WEATHERING THE PANDEMIC WELL
§ Unlike the stock market, where low rates, aggressivemonetary policy, and a flood of new retail investorshave ushered in record high index levels,fundamentals in the underlying economy are stillimpaired. December 2020 brought the first drop intotal employment in seven months and the potentialfor more losses will persist in the early months of2021. Broader circulation of vaccines should bring amore concerted economic recovery in the second halfof 2021.
§ Employment data throughout the pandemic hasalluded to the bifurcation of the labor marketbetween workers with high and low educationalattainment. White collar jobs have held up relativelywell. The maximum unemployment rate for highschool graduates with no college education peaked at17.3% during the height of the pandemic while themaximum unemployment rate for those with a collegedegree peaked at 8.4%. These rates have fallen to7.8% and 3.8%, respectively.
§ These trends reaffirm the strength of knowledge-driven industry sectors and the metros most focusedon these jobs. For real estate investors the data signalthe potential for a rebound in office demand andcontinued strength in rent collections at the higherend of the apartment market. Although work-from-home policies have kept office buildings largelyvacant. Dormant urban cores will bounce back as virusconcerns abate in 2021 – we will explore these trendslater in this report.
§ But growth expectations should be tempered.Companies have adapted new operational efficienciesto function in this business environment. Theseefficiency gains will increase the difficulty fordisplaced workers to re-enter the labor force. Theslow return of children to fulltime in-person schoolingalso creates practical limitations on how quicklyparents will be able to re-enter the workforce.
§ Educational attainment of the workforce is not aperfect indicator of economic health. Sectors tied toecommerce such as couriers and messengers, grocerystores, and home improvement retailers all had verystrong year-over-year job growth. These trendsprovide some insight into the tailwinds driving theindustrial sector and the highly selective approachinvestors must take on the retail sector.
§ Distress is building in some areas of the labor marketand not all households are weathering the pandemicwell. Many businesses face doubtful prospects forreopening, particularly as restrictions aimed atcontrolling the virus linger. There are 9.8 million fewerjobs in the economy today than there were inFebruary of 2020 and over four million workers haveexited the workforce over the past year.
§ Aggressive fiscal stimulus can help smooth over thisdislocation, but it will take a more concerted labormarket rebound to keep household balance sheetssolid, particularly at the lower end of the pay scale.Such a rebound depends heavily on a more successfulvaccine rollout.
ECONOMY
10
SIGNIFICANT DISPARITY IN GROWTH TRENDS ACROSS SECTORSEMPLOYMENT INDEX (DECEMBER 2019 = 100)
JOB PROSPECTS CONTINUE TO FAVOR COLLEGE EDUCATED WORKERS UNEMPLOYMENT RATE (%)
Source: U.S. Bureau of Labor Statistics
50
60
70
80
90
100
110
120
130
Dec-1
9
Jan-2
0
Feb-2
0
Mar-
20
Apr-20
May
-20
Jun-2
0Ju
l-20
Aug-2
0
Sep-2
0
Oct-20
Nov-20
Dec-2
0
TotalBars & RestaurantsFinance & InsuranceCouriers & Messengers
0
5
10
15
20
25
12/31/2019 2020 Max 12/31/2020
Less than a high school diplomaHigh school graduates, no collegeSome college or associate degreeBachelor's degree and higher
INVESTMENT LANDSCAPE
SEEKING OPPORTUNITY IN NEW MARKETS
PerspectiveUNIT
ED
STATES
U.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKBENTALLGREENOAK
12
SEEKING OPPORTUNITY IN NEW MARKETS
§ Social, technological, and economic forces aredriving the rise of secondary and tertiary realestate markets. These changing economicwinds are creating immense opportunities toenhance real estate portfolios. While the riseof new markets is not news to the CREinvestment community, the COVID-19pandemic accelerated these trends along withthe necessity to build tools that empowermanagers to capitalize on this rapidlychanging and increasingly complex world.
§ A push for higher returns has clearly been afactor in the geographic distribution ofinvestments, but the pandemic has helpeddrive change. Working from home isbecoming more culturally acceptable due tothe pandemic. Technological innovation,particularly collaboration software, furtherreduces the need to live in dense, primarymarkets.
§ While we believe high-quality investmentopportunities will exist in primary markets,successful real estate investors will be thosethat best-identify migration and employmentchanges and their impact on CRE markets aswell as mitigate the pandemic-heightenedstructural risks present in primary markets.
§ Lower costs, attractive amenities, andrecreational opportunities are creating spacedemand in emerging locales. These budding
population centers have been requiring more housing, office, and industrial space. In particular, the combination of strong population and ecommerce growth creates a tailwind for distribution demand.
§ The broader basket of cities also has an ESGcase: economically underrepresentedcommunities are better able to participate inthe economic productivity of the U.S. asevidenced by the proliferation of knowledgeworkers discussed in BGO’s 2020Perspective. This broader economicrepresentation creates opportunities todiversify investment portfolios.
§ While primary markets still have strongperformance due to their tremendousagglomeration of talent, amenities, and globalinvestor demand, secondary markets aregaining momentum and investor interest asattractive sources of investment alpha andbeta. These benefits are compounding morequickly during the pandemic.
§ From an investment alpha perspective, theemerging markets narrative continues to playout to the upside. Secondary and tertiarymarkets are well represented in the top tierof performance with metros like Reno,Durham, Memphis, Nashville, Austin, and SaltLake City showing up in the top 25 marketsfor five-year returns per NCREIF.
INVESTMENT LANDSCAPE
12
INSTITUTIONAL INVESTORS CLEARLY SEEKING OUT NEW OPPORTUNITIESTIME IN NCREIF PROPERTY INDEX
GROWING GEOGRAPHIC INVESTMENT DISTRIBUTION A FACTOR IN REDUCING RETURN VOLATILITYROLLING 5-YR. AVG. MARKET COUNT
Source: NCREIF, BGO Research
Source: NCREIF, BGO Research
ROLLING 5-YR. STANDARD DEVIATION OF RETURNS
0%
5%
10%
15%
20%
0
20
40
60
80
100
83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
APARTMENT
CLASS A RENT COLLECTIONS WILL REMAIN STRONG
PerspectiveUNIT
ED
STATES
2021
U.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKBENTALLGREENOAKCLASS A RENT COLLECTIONS WILL REMAIN STRONG
14
Source: U.S. Census Bureau Pulse Survey
CLASS A APARTMENTS SHOWING IMPACT OF SUPPLY/WEAKER DEMANDAPARTMENT OCCUPANCY BY CLASS
ABILITY TO PAY NEXT MONTH’S RENT VARIES BY EDUCATION LEVEL% NO CONFIDENCE IN ABILITY TO PAY % HIGH CONFIDENCE IN ABILITY TO PAY
§ Historically, the rental market has been a safehaven for real estate investors during economicdownturns. Housing is a necessity and renters willprioritize making their rent payment over otherrecurring expenses. The past year has beenunique, however, with record new supply in manymarkets, the severe impact of the recession onhouseholds that rent by necessity, the temporaryexodus of some renters from urban centers, andremote learning at many colleges and universitieseliminated a key source of demand.
§ Overall, the disruption to occupancy has not beensevere. Axiometrics shows an occupancy rate of95.5% in December 2020, just 10 basis pointshigher than the occupancy rate in December2019. Similarly, effective rents have seen only aminor change year-over-year. But these trendsbelie vast differences in performance acrossmarkets with double-digit rent declines in the BayArea and New York and near double-digit gains inBoise, Stockton, Riverside and Sacramento.
§ Our primary concern with the apartment markettoday is the unknown implications of the severerecession on renter’s ability to continue paying therent. Eviction moratoriums and supplementedunemployment insurance have helped concealdistress in the market and the December stimuluspackage included $25 billion in rental assistanceand an extension of the federal evictionmoratorium until January 31st. The AmericanRescue Plan would bring more relief to renters.
§ Economic distress is not evident across all classesof apartment properties. Class A rent collectionsare very strong, but new supply and an outflow ofrenters from urban cores have impactedoccupancy. Demand for these properties willrebound as the pandemic fades and education andoffice job hubs come back online. Class B and Cproperties are maintaining higher occupancy ratesbut are subject to the fallout from higherunemployment among lower-skilled workers.
§ Data from the Census Bureau’s Pulse Surveyshowed that over 14% of renters had noconfidence in their ability to pay next month’srent, with material differences reported acrosseducation levels. NMHC’s Rent Payment Trackershows the percentage of rent payments made inDecember 2020 was down just over twopercentage points from December 2019 to 93.8%.
§ With more supply on the horizon in 2021 andlikely additional economic distress in the nearterm, some apartment markets will struggle.Market and submarket selection will be crucialgiven the significant bifurcation in economicoutcomes and supply/demand fundamentals. Weremain optimistic about the long-term prospectsfor the rental housing market overall.
93.5%
94.0%
94.5%
95.0%
95.5%
96.0%
96.5%
97.0%
Dec
-17
Jan-
18Fe
b-18
Mar
-18
Apr
-18
May
-18
Jun-
18Ju
l-18
Aug
-18
Sep-
18O
ct-1
8N
ov-1
8D
ec-1
8Ja
n-19
Feb-
19M
ar-1
9A
pr-1
9M
ay-1
9Ju
n-19
Jul-1
9A
ug-1
9Se
p-19
Oct
-19
Nov
-19
Dec
-19
Jan-
20Fe
b-20
Mar
-20
Apr
-20
May
-20
Jun-
20Ju
l-20
Aug
-20
Sep-
20O
ct-2
0N
ov-2
0D
ec-2
0
A B C
Source: Axiometrics
05
1015202530
Less
than
high sc
hool
High sc
hool or G
ED
Some colle
ge/asso
ciate’s d
egree
Bachelor’s
degree or higher
4/23/20 to 5/5/2012/9/20 to 12/21/20
010203040506070
Less
than
high sc
hool
High sc
hool or G
ED
Some colle
ge/asso
ciate’s d
egree
Bachelor’s
degree or higher
APARTMENT
INDUSTRIAL/RETAIL
COVID-19 DRIVES CHANGES IN THE RETAIL & INDUSTRIAL SECTORS
PerspectiveUNIT
ED
STATES
U.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKBENTALLGREENOAKCOVID-19 ACCELERATES THE SHIFT TO ECOMMERCE
§ The industrial sector is booming and widelyexpected to lead all major sectors in terms ofinvestment performance for the foreseeablefuture. Early data for the fourth quarter of 2020suggest strong industrial absorption anddeclining availability. Ecommerce has been atremendous secular driver for industrialdemand. Prior to 2020 ecommerce had seen adecade of average annual growth north of 15%.
§ Retail sales data show an astounding surge inecommerce spending over the past year withyear-over-year gains of 44.5% and 36.7% in thesecond and third quarters of 2020, respectively.Lockdowns drove much of this growth and it isreasonable to expect these trends to moderate,particularly if vaccines drive an initial burst ofinstore shopping later in 2021.
§ Advance retail sales estimates for December2020 show nonstore retails sales, which aredominated by ecommerce, rising 19.2% year-over-year. These sales declined month-over-month in November and December, however,suggesting not all of the ecommerce gains seenin 2020 will hold in the near term. Over themedium term, ecommerce should continue tosee double-digit growth rates, bolstered by thescores of households that adopted ecommerceas a key mode of consumption during thepandemic.
§ Past issues of Perspective have also detailedtechnology innovations that will influence theindustrial sector in the years ahead. In 2020 wesaw the FAA adopt new rules that should pavethe way for ecommerce and logistics firms todeliver goods by drone. Automation withinfacilities and driverless vehicle technology aretwo key areas that will cause space utilization toevolve and potentially change the geographicdynamics of supply chains.
§ Markets experiencing stronger demographictrends should be leaders in industrial demandgrowth. This will include locations that havehistorically not been key hubs in the nationalsupply chain, but that do have large and/orrapidly growing consumer bases. To capitalizeon these opportunities, BGO is utilizing machinelearning technology to supplement its use ofmore traditional approaches in market selection.
§ The severity of COVID’s economic impact is alingering downside risk that could temperindustrial’s strong run. High levels of industrialconstruction could magnify the fallout if theeconomy fails to get back on track in 2021 aswe expect. But in most scenarios industrial’ssecular growth trend and strong investmentperformance will be hard to upend.
INDUSTRIAL
16
ECOMMERCE SPENDING SPIKES AMID LOCKDOWNSYOY ECOMMERCE SALES GROWTH (%)
Source: U.S. Census Bureau
3
6
9
12
15
18
0
10
20
30
40
50
2015 2016 2017 2018 2019 2020
Sales Growth Share of Total
ECOMMERCE SHARE OF TOTAL RETAIL SALES (%)
U.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKBENTALLGREENOAK
17
NECESSITY-BASED RETAIL ON THE FRONTLINES
§ COVID-19 and the ensuing lockdowns provedto be the breaking point for many retailerscausing a surge in bankruptcies that will allowsome companies to restructure debt, re-capitalize, and exit leases to emerge as leanerorganizations. But many retailers and restaurantoperators will never reopen, leaving elevatedvacancy rates at retail centers across thecountry.
§ One area of retail that continued to shine duringthe pandemic was the grocery segment. In 2015we saw bar and restaurant spending overtakegrocery store spending for the first time in theU.S. This was a noteworthy datapoint, but notnecessarily surprising given the changes indemographics and lifestyle choices that wereoccurring. This shift was reversed in spectacularfashion in 2020 as bar and restaurant salesplummeted and grocery store spending surged.
§ Some of this jump was undoubtedly fueled bythe utilization of grocery stores as micro-fulfillment locations for grocery delivery orders.However, the penetration of ecommerce intothe grocery segment remains limited, creatinggrowth opportunities for online grocers. Thistrend should also necessitate additional cold
storage demand across the country in all size ranges. Demand will range from new, large-scale cold storage facilities, to smaller last touch locations that could adaptively reuse existing commercial spaces.
§ The severe contraction in the labor market doespose a downside risk in the near term.Americans have been spending less on food ingeneral in recent months. The weak point herehas absolutely been bars and restaurants wherefood costs are higher and local restrictions havebeen reinstated, but there have even beenmodest declines in grocery sales. Widespreaddeterioration in the overall food spend was lastseen in 2009. Many communities have largenumbers of households that are food insecure,and even necessity-based retail spending willexperience localized differences in 2021.
§ Despite economic headwinds and rising grocerypenetration by ecommerce and generalmerchandise stores, necessity-based retailshould remain a solid investment opportunity.Other retail subtypes will require more complexredevelopment and repositioning strategies asvalues bottom.
RETAIL
17
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Grocery Stores Bars & Restaurants
GROCERY STORES REGAIN DOMINANCE OF U.S. FOOD SPENDINGMONTHLY RETAIL SALES ($, MILLIONS)
Source: U.S. Census Bureau
OFFICE
OFFICE FACES CHALLENGING RECOVERY POST PANDEMIC
PerspectiveUNIT
ED
STATES
2021
U.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKBENTALLGREENOAK
19
OFFICE FACES CHALLENGING RECOVERY POST PANDEMIC
§ Lockdown orders and the economicdownturn created significant headwinds forthe office sector that disproportionatelyimpacted downtown markets. A shift togreater workplace flexibility clouds thelonger-term outlook for office real estate.
§ Prior to the pandemic, the sector waschallenged by slowing demand drivers,densification, coworking, high rents,expensive tenant improvement costs, andrising operating expenses.
§ Since the pandemic, vacancy has pushedhigher. According to CoStar, CBD vacancyrose 1.6 percentage points in 2020 andsuburban vacancy rose one percentage point.Major cities have been particularly challengedamid the pandemic due to density, relianceon mass transit, and high costs.
§ Very few markets have been immune todeteriorating fundamentals, but most aretighter than they were during the GlobalFinancial Crisis. Construction has been anissue, particularly in the CBDs of many largemarkets and it has yet to abate.
§ CoStar data show the amount of supplyunderway in CBDs is nearly 3% of inventory,while construction in the suburbs is equal tojust over 1%. These figures are little changedfrom a year earlier as construction delays
have prolonged delivery timelines. Supply will remain a headwind through 2021.
§ Tenants should continue to gain pricingpower and expect generous tenantimprovement allowances. Weaker netoperating incomes are weighing on propertyvalues. NCREIF data show declining officevalues in each of the last three quarters of2020.
§ Firms have been actively subleasing space,particularly in the technology sector, whereJLL tracked 5.9 million sf of sublease space (inblocks > 50,000 sf) during 2020. Many firmsare evaluating their space needs and taking await-and-see approach to leasing.
§ Office properties are likely to perform poorlyover the next year. We do expect officetenants to return, even in CBD locations.Amenities and unparalleled access to laborwill eventually draw tenants back tostruggling gateway markets.
§ We expect to remain highly selective on newoffice investments in terms of both physicalasset and micro location. More attractivealternatives to traditional office in the comingquarters are likely to include medical office,life science, and flex R&D assets wheretenant demand has remained relativelystronger.
OFFICE
19
FUNDAMENTALS IN CBD SUBMARKETS HIT HARDER THAN SUBURBSVACANCY
THE VAST MAJORITY OF MARKETS HAVE SEEN VACANCY RISE OVER THE PAST YEARVACANCY
Source: BGO Research, CoStar Group, Inc.
Source: BGO Research, CoStar Group, Inc.
7%
8%
9%
10%
11%
12%
13%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
CBD Suburban
0%2%4%6%8%
10%12%14%
San Fr
ancis
coAus
tin
Nashv
i lle
Raleigh
Los A
ngele
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Seatt
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New York
Boston
Chicago
Was
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n, D.C.
2020Q4 2019Q4 10-Yr. Average
U.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKBENTALLGREENOAK
§ The largest WFH experiment ever undertakenhas proven largely successful, and there isconsensus from both employees and employersthat there will be greater flexibility in workarrangements post-COVID. But there isconcern among many firms about companyculture, employee onboarding and training, andthe ability to effectively collaborate and driveinnovation over the long term.
§ The future of knowledge work is best describedas a “better integration between work and
home” rather than “WFH.” We agree with consensus that more hybrid work models will evolve for many firms. This also gives rise to the notion of “third” spaces, which could be a coffee shop, a hotel lobby, a coworking space or anywhere there is mobile connectivity.
§ We expect employees will exercise greaterchoice in how and where work is performed tomaximize both productivity and job satisfaction.For many, reducing commute times is critical tooverall well-being. Cities with congestion and
inferior public transit infrastructure are certainly more vulnerable to remote work trends.
§ The prevailing view is that organizations thatembrace more flexibility will have greateraccess to a larger pool of diverse talent. Full-time WFH can often be isolating, thereforepotentially limiting the practical implementationof diverse viewpoints and raising concernsabout employee health and wellness.
§ Firms are also looking for greater flexibilityfrom their office space, which may includeshorter lease terms, increased use of “space-as-a-service” (WeWork, Regus, etc.) anddecentralization of their office footprint toaccommodate more distributed workforces.
§ The following framework helps illustrate howwe are thinking about the evolution of theoffice and how we are monitoring thelandscape.
OFFICE
FLEXIBILITY WILL DEFINE THE FUTURE OF OFFICE
20
FLEXIBILITY OFFICE STILL MATTERS FLIGHT TO QUALITY DE-DENSIFICATION DECENTRALIZATION
Flexibility will define the future of knowledge work. Employees want more flexible work arrangements, and firms want to be more agile. Landlords and spaces must adapt.
Physical office space will continue to be an integral component of the knowledge workers’ “productivity tool kit.” It remains critical infrastructure for culture, collaboration, and employee development.
Health, safety and wellness of employees is paramount. Expect to see a continued flight to high quality real estate that can deliver on ESG factors.
Will physical distancing requirements recede once there is vaccination, or does this signal a shift to towards de-densification? How might space requirements change for an office redesigned for collaborative work “most of the time?”
How does decentralization of knowledge work impact the spatial demand for places to work? How does our ability to work anywhere change where we decide to live and play?
U.S. PERSPECTIVE | JANUARY 2021
BENTALLGREENOAKPERSPECTIVE | JANUARY 2021
BENTALLGREENOAK2021 SECTOR OUTLOOKS
21
Source:: BGO Research
OperatingFundamentals Investor Sentiment Overall
Outlook In Short
OfficeFundamentals have softened from their strong position in 2019. Evolving workplace strategies create uncertainty.
RetailContinued bifurcation with necessity-based retail holding up well and enclosed malls struggling. Many centers require repositioning.
IndustrialDramatic shift to ecommerce propelling exceptional demand. Fundamentals holding steady despite new supply.
MultifamilyUrban challenges ease after vaccination. Potential for pockets of tenant distress. Attractive financing offers compelling risk-adjusted return.
Positive Mixed Negative
Outlook Key
For institutional use only.
ABOUT BENTALLGREENOAK
BentallGreenOak is a leading, global real estate investment management advisor and a globally-recognized provider of real estateservices. BentallGreenOak serves the interests of more than 750 institutional clients with approximately $50 billion USD of assets under management (as of September 30, 2020) and expertise in the asset management of office, retail, industrial andmulti-residential property across the globe. BentallGreenOak has offices in 24 cities across twelve countries with deep, local knowledge, experience and extensive networks in the regions where we invest and manage real estate assets on behalf of our clients. BentallGreenOak is a part of SLC Management, which is theinstitutional alternatives and traditional asset management business of Sun Life.
For more information, please visit www.bentallgreenoak.com
Paul Briggs Managing Director, Head of U.S. Research (617) [email protected]
This document is intended for institutional investors only. It is not for retail use or distribution to individual investors. The information in this document is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this document.
Although BentallGreenOak has taken reasonable care that the information is accurate at the time of publication, such information is provided "as is" for only informational purposes as of the date of publication, and no representation or warranty (including liability towards third parties), expressed or implied, is made (or accepted) as to its accuracy or completeness or fitness for any purpose by BentallGreenOak or its affiliates. Under no circumstances will BentallGreenOak or its affiliates be liable for any direct, indirect, incidental, special or consequential loss or damage caused by reliance on this information or for the risks inherent in the financial markets. Information regarding the past performance of an investment is not necessarily indicative of the future performance of that or any other investment.
Chris LiedtkeVice President, Research & Strategy (617) [email protected]
Gerard MitchellAnalyst, Research & Strategy(617) [email protected] PerspectiveU
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