U.S. Real Estate Research Quarterly

Although the U.S. economy bounced back sharply in the third quarter, the near-term path for the economy and real estate markets remains highly dependent on progress toward a medical solution to COVID and the degree of further lockdowns. The Barings Real Estate team weighs in.

Economy

• The U.S. economy bounced back strongly in Q3 from the unprecedented collapse in Q2 caused by the pandemic and containment measures designed to “flatten the curve.”
• The V-shaped recovery will likely give way to a slower but still-positive growth trajectory that will feature elevated unemployment rates for the next couple of years. 
• Despite Congress’ failure to agree on a new stimulus package, massive fiscal and monetary support is still working its way through the economy and financial markets globally.
• Still, the near-term path for the economy and real estate markets is highly dependent on further progress toward a medical solution to COVID and the degree of any further lockdown restrictions. 
• With Congress unable to agree on a new stimulus package and new COVID cases reaching all-time highs, the near-term risks remain tilted to the downside.
   

Property Markets

• Property market fundamentals continue to deteriorate across most sectors and markets as tenant demand remains weak and the supply pipeline continues to deliver new product. 
• Apartment occupancies have slipped and concessions have increased as new supply continues to come online, but the impact varies widely, with urban high-rise product hit hardest. 
• Industrial property continues to outperform the other major sectors across all metrics, but new completions in Q3 outpaced absorption for a seventh consecutive quarter—a trend that will likely continue through 2022 at least. 
• Office market fundamentals in Q3 continued to deteriorate at an accelerating pace. The more than 50 msf of negative net absorption over the past two quarters (per CBRE-EA) already exceeds the total recorded during the GFC, and sublease space has increased sharply. 
• Retail rent collections are improving as many retail businesses remain open—some at limited capacity, such as restaurants, gyms and hair salons—and foot traffic slowly returns. 
• The U.S. hotel market continues to struggle most from the travel restrictions and social distancing requirements meant to contain the COVID outbreak.