Transwestern: Economic Recovery From COVID-19 is Well Underway

Economic recovery from the fallout of the ongoing COVID-19 pandemic is well underway and is happening quickly, according to Transwestern’s Senior Managing Director of Investments and Analytics Jimmy Hinton.

“With markets reopening and employees coming back on payrolls, what we’ve seen is a fairly sharp rebound in the number of jobs that are being added,” said Hinton during a June 17 edition of Transwestern Talks focused on interpreting economic indicators.

Hinton noted the recent May jobs report from the U.S. Bureau of Labor Statistics, which reported that the U.S. added 2.5 million jobs at the end of May.

“That kind of employment growth is usually achieved over the course of an entire year and not in an individual month,” he said. “Many of the jobs that were added back came back strongest in the markets that had experienced the biggest decline.”

Some of the strongest growth came from leisure and hospitality, which had lost 8.8 million jobs since the pandemic began and gained back 1.5 million in May. Construction was the next strongest sector in the month of May, adding back 600,000 jobs.

On the property valuation side, the REIT market is seeing corrections hovering around 25% after declining 45% initially during the early stages of the pandemic, according to Hinton. However, valuations in the office REIT sector have remained significantly declined, as work-from-home plans for employees have been extended.

“On a property type basis, industrial and data center REITs continue to outperform,” he said. “What’s interesting to us is that in the past couple of weeks the office REIT sector has really experienced a significant decline in valuations. We attribute this to some of the comments that technology companies such as Twitter and Facebook have recently made relative to extending their work from home plans for employees.”

Despite declines in valuations, Hinton noted that he has not necessarily seen a decline in office leasing demand or a prolonged problem in terms of rent collections with office landlords.

On the office leasing side, the majority of executions have been tilted towards renewals as opposed to new organic leases or expansions. Hinton said that the majority of office tenants are taking a wait-and-see approach as far as when they can reopen and normalize operations.

Another debate that has risen out of the COVID-19 pandemic is what will happen in terms of demand for space in urban markets vs. suburban markets.

“Looking back through previous cycles and expansions and declines,” said Hinton, “Suburban submarkets have always had an easier time absorbing availability whether the market is expanding or contracting. Even during the financial crisis, suburban markets in aggregate never recorded negative net absorption, and through the resulting expansion had an easier time picking up slack from companies that were looking for more affordable spaces to house their corporations.”

On the sales side of the market, deal flow has started to pick up, Steve Pumper, executive managing partner at Transwestern reported during the webinar.

“Given the amount of capital raised recently by investors, coupled with a loosening of the debt markets, a rebound in the stock markets and the reopening of the country, it appears that sellers are beginning to slowly list properties,” said Pumper. “The critical element is price discovery, it is still going to pose a major obstacle as far as deals transacting. The divide between a sellers and a buyers expectations remains quite significant.”

Pumper added that as far as transactional activity, private buyers are leading the way and are focused on opportunistic acquisitions, while institutional investors are being patient and waiting for additional pricing metrics.

One of the highest performing segments of the market through the pandemic has been single tenant net lease deals.

“As we look at where we are today versus one year ago, the single tenant net lease volume has held up quite well and is only trailing last year by single digits,” said Pumper.

As we move out of the COVID-19 pandemic, Hinton expects to see the overall movement of people out of high cost urban markets to nearby lower cost markets. But, he was quick to point out that this is not a new trend, just an acceleration of an existing one.

“There aren’t really a lot of new trends coming out of the pandemic,” he said. “It’s more of an acceleration of things that are already in fruition.”

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