You Asked Us: Is there any light at the end of the tunnel for the global commercial real estate sector?

WBEF expert panel:

Ann Gray, Principal, GRAY Real Estate Advisors

Simon Rubinsohn, Chief Economist, RICS

New asset groups such as data centres may be in demand, but they don’t create as many jobs as traditional assets (retail, hospitality, etc.). How can policymakers balance these priorities in order to best support local economies?

Ann Gray: This is a tough question. Urban planners are generally happy to see the temporary spike in construction related labour that comes with new developments. If you measure jobs data over a large enough area, the count is likely balanced out by increased product development, manufacturing and consumption related to the industries that data centres support. But if you measure job creation in a smaller area, it doesn’t look good and begs the question: should there be a higher tax on those kinds of projects to underpin social schemes necessary to support an underemployed population? Another approach is to place those “new” assets in jurisdictional areas with no local residential population, and so no demand for local employment or consequent social services. A good example of this is the City of Vernon in California, which was incorporated to be an industrial centre and has a population of 110 people over 5.2 square-miles.

What is the panel’s view on the potential for increased Consumer Price Inflation (CPI) caused by government stimulus, and how this might affect real estate pricing in the years ahead?

Simon Rubinsohn: It is likely that consumer price inflation will pick-up from current levels over the course of the next couple of years. Whether it will reach a level that materially impacts the interest rate outlook and real estate pricing is rather more questionable. Critically, despite the hefty government stimulus supporting activity since the onset of the pandemic, scarring resulting from the COVID-19 crisis is likely to exert a medium-term drag on economies. This will, in all probability, keep both the level of unemployment and spare capacity somewhat higher than previously. This doesn’t mean central banks won’t look to take back some of the additional monetary stimulus they have applied over the past year; but it is likely, in my opinion, to be a very gradual process. That said, I would acknowledge the uncertainty attached to the current environment and recognise there will a temptation on behalf of governments to reduce the value of public sector debt (in real terms) by allowing inflation to run at a somewhat higher level than in the past.

AG: The rule of thumb is that real estate goes up in price when consumer prices increase. If the government notices inflation getting too high, they may raise interest rates which can lower real estate prices because higher debt service makes property less affordable. However, at least in the US, the government has shown no inclination to raise rates any time soon and our stimulus is likely to be too meagre to cause upward pressure on CPI.

As high streets/main streets continue to struggle, what does the future hold for out-of-town retail centres? Do you see any new concepts or innovations emerging in this field?

AG: Out of town retail tends to be big-box format and those assets continue to be repurposed for a variety of interesting things. For example, I know of one that was turned into antique car storage with a cocktail lounge, creating a social venue for car lovers. Art and wine storage is another favourite – where it’s not too far from the appropriate demographic. We more often see large-scale recreational uses such as rock climbing, trampolining, BMX, and parachuting. More creative uses can include megachurches and food halls where local demand exists.

Will we see a stabilisation, or even recovery in the second half of 2021? Or will we be waiting until 2022 and beyond?

SR: Feedback to the Q4 2020 RICS Global Commercial Property Monitor survey suggests a degree of caution is warranted – even though economic numbers will improve as the vaccine programme is rolled out. The challenge in answering this question centres on divergent sector trends which reflect structural as well as cyclical influences. As discussed during the webinar, there is still much debate about the role of offices in the post-COVID-19 world. Imaginative conversions will only account for some of the surplus retail space. Feedback to the Global Commercial Property Monitor is that many markets are still viewed as expensive – particularly in mainland Europe. This is noteworthy as it relates to the next phase of the real estate cycle. Could this prove to be a constraint on future performance, particularly if some of the accommodation in monetary policy is reined in?