CBRE officials: C-19 recession will be 'deep' but brief for commercial real estate

Commercial real estate in Utah is in for a “deep” but relatively brief recession due to the COVID-19 pandemic, according to officials at CBRE.

Speaking at a webinar about the virus’ impact on real estate, those officials said Utah is positioned well to endure the pandemic and rebound quickly thereafter.

Darin Mellott, Americas director of research for CBRE, said recovery in real estate will vary by market and likely will lag the national economy’s resurgence by several quarters.

“Markets such as Salt Lake City, with diversified economies and favorable demographics, will recover more quickly,” Mellott said during the webinar, organized by World Trade Center Utah in partnership with CBRE. “But similar to the Great Recession, we will feel the full force of the downturn here, but we are positioned to bounce back faster.

“We’re in for a scary and deep but somewhat short-lived recession, with recovery starting in the second half of 2020 and very strong growth in 2021.”

Lloyd Allen, managing director for the Salt Lake City office of CBRE, noted that Utah’s position on the map has kept the industrial and logistics sector busy, as Utah is a crossroads for railroad and grocery distribution. “That is keeping our industrial and logistics sectors going well,” he said.

While the state faces a challenge because it has more than 7 million square feet in those sectors in construction — twice what it had at the end of 2018 — projects should see both availability and vacancy increase only slightly.

“Those are still healthy market elements with respect to our warehouse and our manufacturing sector,” Allen said.

As for office, nationally it should be “somewhat insulated” from the overall impact of the virus compared to other commercial real estate sectors. Locally, some office experts are indicating that nine out of 10 deals have been paused, he said. In Utah, over 3 million square feet is under construction but 55 percent was preleased, he said.

Projects involving hotels and hospitality are being the hardest-hit, followed by retail other than grocery stores and pharmacies and shops near them. Utah is consistent with the national impact on retail although it has seen many vacant mid-sized box stores absorbed by smaller retail companies.

As for the national economy, Mellott said the second quarter will be “absolutely brutal,” with GDP falling by at least 32.5 percent. Unemployment could be near 15 percent. Economic stabilization will begin in the third quarter but be a “process” and will vary from state to state, he said.

“We may see some localized pumping of the brakes as officials have to react to new outbreaks as they occur. Now, provided, other states, like our state, where we have mass testing capabilities, we can be more surgical in those closures and restrictions than we have in the past,” Mellott said.

Conditions should improve by next year, with U.S. unemployment being near 5 percent by the end of 2021, “which is widely considered the number at which the U.S. economy is at full employment,” Mellott said.

David Bauman, director of global workplace solutions for CBRE’s Southwest Region, said that given the rough stretch expected in the next few months, the relationships between tenants and landlords could be strained, especially if tenants are unable to meet their rental obligations.

“A lease represents a long-term relationship,” he said. “At different times, each party will require the other to act reasonably, irrespective of what the lease may say. In today’s environment, we believe it is in both parties’ interests to not only know the obligations under the lease, but come together in openness and understanding to discuss any hardships created.”

Every lease is different and both tenants and landlords should contact their attorneys to better understand their obligations, he said. But he suggested everyone take a “we’re all in this together” approach.

“I can’t stress enough the long-term relationship between a tenant and a landlord,” Bauman said. “This should motivate both parties to seek consensus, and both parties will need to be willing to give in order to find a win-win solution.”

As for getting tenants back into their rental spaces, renting companies will want to consider a long-term strategy, addressing questions related to density and spacing of workers, the option of working from home, sick leave policies, furniture types and cleaning protocols, he said.

“All of these,” Bauman said, “are now becoming probably the‘new norm’ for a little while — or permanently.”