Lessons of 2020 apply to commercial real estate outlook for 20201

Tim Whitney

Before considering what’s in store for commercial real estate in 2021, let’s review some of the lessons from 2020.

As with any economic disruption, there were winners and losers. The coronavirus pandemic expedited declining demand for such traditional brick-and-mortar retail locations as enclosed malls and department stores even as consumers adapted to online shopping more quickly. 

While hotels and restaurants suffered,  demand for industrial space increased to support distribution and storage. Freestanding retailers — especially drive-thrus — and net leased office spaces held up well compared to actively managed retail.  

The sudden shift to work from home created new expectations about flexibility that can’t be undone. People are making new choices about where they want to live and how and where they want to work. The massive deployment of remote work technology platforms has only accelerated this push.

I expect the recovery in 2021 to be led by industrial, grocery retail, multifamily, land, single-tenant net leased and drive-thru retail properties. Small office spaces will be preferred over larger ones, and tenants will look for flexibility in lease terms. Vacant malls will be repurposed for nontraditional tenants as obsolete retail space is recommissioned. Secondary and tertiary markets will grow, a reflection of where people prefer to live.

A recovering economy paired with continued low interest rates should sustain the private investor market and could push commercial real estate asset prices higher in 2021.

Context is important. This was not a real estate-led recession. Many investors are well-capitalized and remain active in the market, even during the shutdown. That’s especially true of local private investors and those with 1031 tax-deferred exchanges. 

As a result, capitalization rates should see steady to downward movement when the crisis eases. Rates for retail, hospitality and mid/high-rise office could remain unstable over the next few years, though. Expect land sales for housing and industrial developments to remain in short supply in 2021. Freestanding net lease formats, drive-thru retail and essential businesses should hold up well compared to actively managed retail.

This column contains some excerpts from the Coldwell Banker Commercial national real estate outlook for 2021. The entire report is available through my office.