How the Labor Shortage Shapes Commercial Real Estate Trends

Role of Labor Markets in Return-to-Office Decisions

• Health concerns were original reason for remote work, but worker preferences are now the biggest hurdle
• Strong job gains continue to support consumption and CRE space demand
• The U.S. currently has a substantial labor shortage which drives continued remote work trends

What it Could Take to Resolve the Labor Shortage

• Overall unemployment rate is 3.7% and just 1.9% for college educated workers
• Severe shift necessary to re-align employment trends

What this Means for Commercial Real Estate?

• Remote work benefits suburban CRE space demand
• Return-to-office would boost urban CRE demand
• Lingering labor shortage a headwind for service staff dependent CRE like hotels and seniors housing

*Through July, Unemployed through August
Sources: Marcus & Millichap Research Services, BLS

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Commercial Real Estate Investment Hit Record Levels

Favorable Fundamentals Drove Record CRE Transactions

• Elevated market liquidity, strong property outlooks and inflation resistance drew many investors to CRE properties
• CRE transactions in 2021 exceeded prior peak by 29%; 1Q 2022 sales activity ahead of prior year
• Placing downward pressure on cap rates

Aggressive Acquisition Climate Fueling Price Surge

• Office, MT-Retail and Hotels, which were hard-hit but are starting to recover, saw modest price growth
• Strong demographic trends and favorable outlooks drove strong price appreciation for Apartment and Self-Storage
• Record transactions fueled outsized Industrial price gains

Will CRE Transactions Maintain Their Momentum?

• Strong CRE outlook will continue to support property space demand
• Stock market volatility may push capital to CRE, sustaining further buyer demand
• Fast rising interest rates could erode some sales activity

*Pre-Pandemic period: 2019 through 1Q 2022; MT=Multi-Tenant
Includes sales $1 million and greater
Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc.

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What the War In Ukraine Means for CRE Investments

Sanctions Imposed on Russia Raise Inflationary Risk

• The sanctions and financial lockdown of Russia will likely curtail Russian exports of oil, gas and metals
• Likely to result in higher prices for fuel and certain goods, placing upward pressure on inflation
• Real estates’ general inflation resistance mitigates major impacts, but inflation poses other economic risks

Large Levels of Uncertainty Surround the War

• Rising uncertainty may drive investors to safer investments, such as bonds and hard assets, like CRE
• Can place downward pressure on interest rates
• However, uncertainty may also slow investor decisions and actions; could weigh on CRE transaction activity

Commercial Real Estate Outlook Remains Positive

• A lot of unknowns remain on the extent and severity of the war, but the implications for CRE are limited
• Barring major escalations, commercial real estate remains well positioned with strong, underlying demand drivers

*Through January; 10-Year Treasury through March 02
Sources: Marcus & Millichap Research Services, Federal Reserve, BEA, BLS

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Low Bond Yields and Elevated Inflation Risk Invigorate Buyer Interest in Net-Leased Assets

• Demand for single-tenant properties to last beyond health crisis. Most of the traditional users of net-leased retail space weathered the pandemic better than many sectors of the real estate market.
• Retail sales well above pre-pandemic levels. Single-tenant retailers continue to benefit from the influx of stimulus capital pumped into the economy in the wake of the health crisis.
• Labor shortage hamstrings some sectors. A few states with stringent lockdowns may see restaurant closures near 33 percent, while others may only experience 10 percent losses.
• Reopening to support single-tenant retailers. As workers return to offices, more visits to single-tenant facilities will aid in retail sales at stores near offices and other establishments that rely on commuters.

Click Here to View the 2H21 National Single-Tenant Net-Leased Retail Outlook Report

*Forecast | Sources: Marcus & Millichap Research Services; CoStar Group, Inc.; Real Capital Analytics, Capital Economics; Freddie Mac; Moody’s Analytics;
Mortgage Bankers Association; National Association of Realtors; National Association of Home Builders; BLS; Federal Reserve; RealPage, Inc.; U.S. Census Bureau; Wells Fargo

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Retail Market Recovering More Quickly Than Expected; Investors Selective But Actively Acquiring Properties

• Retail sector poised for growth. Following the upheaval caused by the health crisis, retail property performance is expected to begin realigning with the new realities of space demand.
• Consumer spending surge to remain during second half. Since February of 2020, core retail sales have soared by 16.8 percent, largely supported by government stimulus.
• Job creation potential at record levels. Employers are having a challenging time finding and onboarding workers as the economy transitions out of the health crisis.
• Bevy of light headwinds persist for retail. Most indicators point toward a better-than-expected recovery for the retail market, though some concerns exist that could impact brick-and-mortar locations.

*Through May
Sources: BLS; Federal Reserve; Office of Financial Research; U.S. Census Bureau

Click Here to View the National Retail Outlook Report Midyear 2021

*Forecast | Sources: Marcus & Millichap Research Services; CoStar Group, Inc.; Real Capital Analytics, Capital Economics; Freddie Mac; Moody’s Analytics; Mortgage Bankers Association; National Association of Realtors; National Association of Home Builders; BLS; Federal Reserve; RealPage, Inc.; U.S. Census Bureau; Wells Fargo

Follow Jesse Limon CRE on Twitter

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