Interview, Fireside Chat
Commercial Real Estate and the Economic Recovery
- Goldman Sachs analysts identify office, retail, and industrial sectors as the primary REIT categories currently facing distinct pandemic-related headwinds and opportunities.
- Office REITs, heavily concentrated in New York, San Francisco, Seattle, Los Angeles, Boston, and D.C., are expected to see utilization and leasing activity improve from Labor Day through September.
- Rising office utilization is projected to sequentially drive improved occupancy, followed by positive rent growth for office properties.
- CEO sentiment regarding post-pandemic space needs has shifted dramatically: 70% anticipated needing less space last summer, compared to only 17% in the spring follow-up survey.
- Despite hybrid work models, analysts advise planning for near-term peak utilization of 100% of the workforce, as one-to-two days of remote work still necessitates space for the majority of the week.
- Return-to-office trends in cities with lower reliance on public transportation may serve as leading indicators for New York and San Francisco due to those cities' stricter shutdowns.
- Open-air retail REITs are forecast to achieve higher per-square-foot rents as tenants like grocers and off-price retailers refill vacancies, with occupancy declines viewed as temporary.
- Mall REITs faced 2020 occupancy losses from retailer bankruptcies, leading to near-term prioritization of occupancy over rent concessions.
- The long-term outlook for mall REITs is less constructive than open-air centers due to persistent e-commerce demand and structural pressure on fundamentals.
- Industrial REITs benefit from e-commerce logistics needs, driving significant market rent growth in major metro markets and enabling continued property development despite a 2020 uncertainty slowdown.
- Industrial properties in key locations are positioned to sustain higher rents and occupancy rates as e-commerce requires faster delivery capabilities.
- Inflationary environments are generally viewed as positive for REITs if they coincide with a strong economy and tenant ability to pay higher rents.
- Short-lease-term sectors (hotels, self-storage, apartments) are better positioned to hedge inflation by resetting rents on a one-day, monthly, or annual basis.
- Long-lease sectors (office, retail, industrial) rely on embedded annual escalators to mitigate inflation, with full rent resets occurring only upon lease expiration (typically 5–10 years).