12/15/2020 | by

REITs and commercial real estate are likely to begin to recover in 2021, according to the Nareit 2021 outlook for REITs and commercial real estate. The pace of improvement will be driven by the availability and effectiveness of the vaccine or vaccines against COVID-19. REITs, CRE markets, and the economy as a whole are bolstered by the solid fundamentals that were in place when the pandemic hit, in sharp contrast to prior recessions.

The recent approval and imminent start of distribution of the vaccine is encouraging, but unfortunately will not begin to have an impact on the economy or commercial real estate for several months. As a result, we do not expect much improvement in real estate markets until the second half of 2021.

In fact, conditions in CRE markets may get worse before they get better. Vacancy rates and rents lag changes in demand, and may well deteriorate through 2021. Vacancy rates may not peak until 2022, and rents will not bottom until after that happens. The next six months will remain quite challenging, with more pronounced improvement in the second half of the year and a more complete recovery in 2022.

Financial strength will be critical during this period. Most REITs have been resilient so far during the pandemic due to strong balance sheets and liquidity. Leverage was at or near record lows when this crisis hit (REITs raised $460 billion equity capital between 2009 and 2020), REITs lengthened debt maturities and have holdings of cash and securities plus committed lines of credit.

There will continue to be wide variation across property sectors in 2021, and it may well be the mirror image of 2020. Those sectors that were most directly affected by reduced travel, business closures, and social distancing, including lodging/resorts, retail, and health care REITs, may have a more robust recovery in 2021. This reflects, however, the larger declines in 2020 that give them more potential for upside gains as the vaccine against COVID-19 is administered and the economy returns to more normal conditions.

Read the full outlook for next REITs and commercial real estate in 2021.

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