Eruption Ahead: Pent-Up Demand Will Drive the Economy

January has long been the time for market predictions, for economists to put their nickel down on which way the dollar will go. But how do you do that following the most fractious three quarters in living memory? Undaunted by the events of 2020, Dr. Mark Dotzour did exactly that, providing the keynote remarks for the 19th annual Commercial Real Estate Forecast Conference. While offering the caveat that economists are generally only right 50 percent of the time, he nonetheless expressed bullishness for the upcoming year. The biggest factor that will impact the U.S. economy during the next 12 months is pent-up demand. Currently, Americans aren’t spending money, they are saving it. This is an untenable situation since, as Dotzour put it, “Americans don’t tolerate deferred gratification.” COVID fatigue set in months ago for many people. Once the vaccines have been widely distributed, he foresees an explosion in spending. But instead of toilet paper and hand sanitizer, there might be a shortage of hotel rooms and airline seats. Dotzour said he is not underestimating the power of this pent-up demand for goods and services such as new clothes, vacations, conventions, gyms, live music, restaurants, weddings, theaters, business travel, going back to school and more. The supply chain proved to be more fragile than most people would have expected once the lockdown started in March of last year. As an example, half of all toilet paper typically goes to restaurants and half goes to homes, but most domiciles don’t have the hardware for three-foot-wide wheels of toilet paper, hence the shortage of that product. Will the supply chain fail us again once life returns to “normal”? Dotzour believes it’s hard to say. His biggest concern is that the supply chain remains robust enough to dispense the vaccines, pointing out that there are thousands of distribution job openings right now. Another worry is that there may be runaway inflation in our future, though Dotzour downplays those concerns. Factors such as higher gas prices, hotel rates, airline tickets and tuition could lead to inflation of the U.S. dollar. However, he feels that there are enough protections in place to prevent a runaway scenario. The Federal Reserve’s control of interest rates, for example, should mitigate escalating mortgage rates as housing is going to help lead us out of this recession. The real long-term concern is the likelihood that we will see another jobless recovery. That doesn’t mean we won’t have new jobs, but they will materialize too slowly. Historically, regardless of which political party is in office and notwithstanding tax cuts, the U.S. averages job growth at 2.5 percent. The main factor for this is globalization. Emerging economies around the world are creating more competition for the U.S. “We have purposely exported our jobs around the world. These are now tough competitors,” Dotzour said. “The world in which the U.S. is competing in 2021 is different than it was in 1980.” That said, Dotzour believes that money is going to flood in again. Private equity is sitting on $204 billion of dry powder. While we are all aware of distressed sellers, Dotzour labels these funds as “distressed buyers”—they’ve raised the capital and are hungry to deploy it. Global institutions continue to raise their allocations to real estate. The general rule of thumb used to be to spread funds 50/50 between bonds and real estate. Each year, higher CRE yields have led to more growth in institutional investment. “If you thought there was too much money chasing deals before, there’s a lot more coming down the road,” Dotzour said. The pandemic has impacted the U.S. just as it has other nations, though we may be taking a larger hit than most. Additionally, 2020 and even early in 2021 have proven that there is a lot of societal and political angst in our populace. Despite its problems, however, America is still going to be an attractive target for global investors. “Money is not flowing out of U.S.,” said Dotzour. “We have our problems, but we are still the prettiest pig at the trough.” Dotzour covered many more topics during his keynote, such as the urban to suburban migration, the future plans of the Biden administration, rising shipping costs and much more. It will be interesting to see how the next 12 months shake out; the ride hopefully won’t be as bumpy as the past 12 months.

Future of Flex: How Employee Choice Could Change Offices for Good

Of any sector in commercial real estate, the future of office is arguably the most tenuous. Even as some employees return to the office, many may not—now or potentially ever. Companies and their workers have found value in flexibility of the stay-at-home experiment, choosing to extend it for the foreseeable future in some cases. In other instances, a kind of middle ground is being explored: the use of flex space. “Companies are scrambling to figure out this new world, figure out how they support their employees’ diverse needs, figure out how to create workplaces not only at a headquarters but also near their teams’ homes, and figure out what to do with their leases that now pose even greater liabilities,” said Anna Levine, chief commercial officer of Industrious, which offers coworking and private office space all over the country. “Ironing out all of this can be overwhelming, especially at a time when companies are knee-deep in responding to all of the other changes the pandemic has brought on.” That’s why so many companies—and even individual employees—are turning to outfits such as Industrious. In some cases, the company just isn’t ready to have everyone back in headquarters, while many employees may also favor the convenience of working from home. It isn’t always a perfect environment, however, as any parent can share. A home office is still at home, which comes with an untold number of distractions. “Demand for coworking space is very much driven by people who need a location to work that isn’t their home,” said Ben Munn, JLL’s global flexible space lead. “We’ve seen demand increasing in near-to-home, suburban locations or dense residential areas and it tends to be for smaller requirements.” That’s precisely what Regus, which provides coworking and virtual office space, has witnessed in the past few months. “Currently, we are seeing much greater growth in smaller suburban areas as employees look to cut down on their commute and work closer to home,” a company spokesperson said, touting Regus’ representation in large metropolitan areas, as well as smaller towns and cities. “Our model is very well suited to the changes that are now taking place.” Click to read more at www.rednews.com.

CCIM Office Sector Luncheon—Demand, Density and Flex Space: Systemic Change or Return to Yesterday?

Keynote Speaker: Dr. James Gaines, Chief Economist, Texas A&M University, Real Estate Center

February 2020, was the peak of the 128-month-long prior recovery; then we fell sharply into recession
• Down 31% in Q2 and down 25-30% in Q3 (est.)
• Since March nationwide, 63 million have filed for unemployment—about 38% of the workforce; in Texas, 6 million; Texas lost 1.4 million jobs in March-April alone; lost jobs have now recovered by about one-half; Houston has retained 92% of pre-COVID jobs
• Texas has had a ‘double whammy’: oil and COVID…energy demand is down and will stay there for a while, although price at $40 bbl seems to have stabilized
• Our federal deficit will hit $4 trillion this year, and the Fed has had to borrow $3 trillion of it; in 2-5 years there will be a huge debt overhang
• 3.4 million mortgages—7% of total-are in forbearance arrangements, but those arrangements may expire in early 2021
• For recovery, we must: a) get virus under control b) increase consumer demand and spending c) re-employ people d) stabilize/improve global trade
• We have no inflation and stable (low) interest rates at or lower than 3%
• Texas is a little better off than rest of the U.S., and it should be early 2022 before we approach under 5% unemployment
• Home sales are up 3.5%, and prices up 5-6%; there is an inventory shortage of single-family homes; new home construction is up and could be one of major drivers pulling us out of current slump

South Central Texas Post-COVID-19 Forecast

Office

Office in San Antonio “Ok” and not sliding too much; 15% vacancy citywide, with average rents $21.85 down from $22.50 this time last year; robust development market; tenants beginning to return to offices

Some landlords working with tenants on short-term renewals to build tenant goodwill, and to retain them.

The hybrid work from home and office model is here to stay, although the productivity metric for this formula is not fully known yet.

Company culture is “at the office” and it is especially important to for new hires to interact with peers and senior employees as they learn and absorb the company culture.

When pandemic recedes, we will be quick to return to old habits and dense environments, office and social; in 18-24 months we will be back to normal here

8% unemployment in S.A.

STREAM Capital Partners Arranges $29M Sale-Leaseback of Cold Storage Facilities in Dallas and San Antonio

STREAM Capital Partners has arranged the sale and leaseback of two cold storage, food-production facilities in Dallas and San Antonio. The properties total 187,000 square feet. Chelsea Mandel of STREAM Capital Partners represented the seller in the transaction. The facilities are occupied by Surlean Foods, a leading custom food manufacturer of both raw proteins and cooked kettle items. Founded in 1979, the company is a third-generation, family-owned business. “Chelsea and her team did a great job,” said Daryl Scott, president of Surlean Foods. “This transaction provides additional capital allowing us to continue reinvestment into our business that has seen tremendous growth over the last 12 months.” Mandel has been very active in the cold storage sector and sees tremendous investor appetite for freezer/cooler, food-related facilities. She expects this trend to continue throughout 2021. “This was a terrific transaction to lead,” Mandel said. “My client now has a real estate partner to help facilitate the business’s growth, and the buyer added to its portfolio two high-quality, cold storage assets in growing industrial markets leased on a long-term basis to a premier tenant in the food manufacturing space.”

NAI Partners Arranges 30-Acre Land Sale in Cibolo, TX

NAI Partners recently arranged a 29.87-acre land sale on Green Valley Road in Cibolo, Texas. NAI Partners’ Brett Lum represented the seller in the transaction. The buyer was the Board of Trustees of the Schertz-Cibolo-Universal City ISD. “The purchase is part of Schertz Cibolo Universal City ISD’s 10-year comprehensive board plan to handle the ongoing and projected increase in students,” said Lum. “There has been an explosion of growth in Northeast San Antonio and particularly between the IH 35 and I10 corridors with much of it within the SCUCISD borders.”