The good news about the outlook for the economy and commercial real estate as of early June is that we are likely at a turning point for labor markets, consumer spending, and business activity. The bad news is that the early stages of recovery will be tentative and uneven. Fortunately, the economy will have some help getting back on its feet, from fiscal stimulus, low interest rates, and credit programs by the Federal Reserve.
Nareit recently released its mid-year outlook for the economy, commercial real estate, and REITs. Commercial real estate markets may continue to weaken through the summer months, lagging the upturn in the macroeconomy, as a slow recovery in business activity leaves many tenants still short on cash flows. Vacancy rates will rise in most property types, although the increase may be less severe than in some past downturns. Commercial property prices and rents are likely to edge lower but stabilize before year end.
REITs will likely experience further declines in FFO in the second quarter, and occupancy rates are likely to decrease. The REIT industry began this crisis from a strong position, however, with record earnings in 2019, high occupancy rates and strong balance sheets. Most REIT-owned properties are of high quality and their tenants often are financially more secure than those in many privately-owned properties, which may help shield both the tenants and also the REITs themselves from some of the economic damages caused by the pandemic. All of these factors should help REITs successfully weather the challenges ahead.