Michael Knott, managing director and head of U.S. REIT research at Green Street Advisors, participated in a video interview in conjunction with Nareit’s REITweek: Virtual Investor Conference (held June 2-4).
Green Street believes the United States is in a deep recession, Knott said, and “the length is open for debate.” Despite some recent optimism in the market, this will not be a V-shaped recovery, he said, and currently the expectation is that the pace of GDP growth seen in 2019 won’t return until mid-2022.
Digital economy sectors are expected to fare better over the next several years, with higher net operating income (NOI) growth over 2019 levels, Knott said. Several of the COVID-hit property sectors such as malls, lodging, strip centers, and net lease will fare noticeably worse, with NOI below 2019 levels over the next few years, he added.
Meanwhile, Green Street’s economic outlook sees 2024 as a “more stabilized level,” Knott explained, with cash flow levels about 7% lower on average than pre-COVID levels. “There is some permanent economic damage that we don’t recover and that does leave some scar on property values,” Knott said. For challenged sectors, 2024 cash flow is expected to be 10-20% worse than the pre-COVID forecast, he noted.
Taking a broader look at the impact of the coronavirus crisis on real estate, Knott highlighted the “collective pleasant surprise from the forced work-from-home experiment.”
“While office likely stands to benefit over the short run from unwinding this decades-long densification trend that packed ever more employees ever more tightly…over a longer timeframe there could be some negatives from increased work from home,” Knott said.
Knott also said the work-from-home trend could have a spillover effect for residential real estate. It could also prove to be a potential negative for expensive gateway cities with poor fiscal health but positive for secondary markets with better fiscal health.