After one of the swiftest economic declines in history at the start of the COVID-19 pandemic, the U.S. economy has experienced a significant recovery that began in the third quarter of 2020 and is continuing into 2021, experts said on Friday at the Commercial Economic Issues and Trends Forum. The panel discussion during the virtual REALTORS® Legislative Meetings(link is external) explored the implications of the recovery for commercial real estate, predicting that hospitality, retail, multifamily, and industrial are likely to see gains this year. Even the office sector, which has been plagued with higher-than-average vacancy rates, is showing signs of potential.

Personal income is up 10.7% year over year, said Lawrence Yun, the National Association of REALTORS®’ chief economist, and personal savings is up an astonishing 302% for the same period. Considerable capital is likely to be pumped into the economy, he said, with consumers eager to tap into a year’s worth of savings and what remains of their stimulus funds. “If we look at potential, it’s even greater than we could have expected,” said Yun. “We’re looking at ‘revenge’ spending, where people have been stuck at home, saving up money, and now they can go out again.”

Online retail sales have been booming, Yun stated, reaching a peak of $871.2 billion 2021 in February—up from $676.4 billion in April 2019—while in-person sales at department stores have declined slowly but steadily from January 2000 to February 2021, falling from just over $200 billion to approximately $100 billion. Yun indicated that there could still be some potential for recovery for department stores. “It remains to be seen if people are willing to get back into stores,” he said. “They have savings, and now they want to go out again. Let’s see how things play out.”

Yun noted that consumers are still showing caution in their spending on hotels, restaurants, and recreation-based businesses like theaters and live sports, though the general trend is positive. He predicted that the continued easing of pandemic-related restrictions across the nation could help. “The numbers are showing that vaccinations are making progress,” said Yun. “So, going to restaurants, going to recreation, games, all of that could begin to burst out.”

Yun predicted that apartment rent prices, which had been decelerating during the pandemic, will trend upward, noting that while rents have declined in gateway cities like Seattle, Boston, and San Francisco, 93% of smaller metro areas have seen an increase in rent prices as of April.

While the increase in rents is good news for housing providers, Yun does add the caveat that an increase in rent prices could contribute to an increase of pressure on consumers, which combined with other factors, points to an ongoing rise in inflation.

The economy is fully back, Yun stated, but jobs are still lagging, and the U.S. will need 8 million more jobs to reach pre-pandemic levels. At the same time, gasoline prices are up 22% from a year ago, Yun said, adding that consumer price inflation has risen above 2%. In addition, producer prices on construction materials, such as cement, aluminum, and copper, are all likely to rise as the economy strengthens, he said.

“Inflation could possibly stay stubbornly high above 2%,” said Yun, adding that inflation impacts commercial real estate practitioners through mortgage rates. “The mortgage rate can rise if inflation continues to pick up and remains high,” he explained.

Another area of potential concern is office vacancies. Even though workers are returning to the office, he said, and the percent of workers who are telecommuting has fallen to 21% as of March—down from a high of 35.4% in May 2020—more than half of NAR commercial members reported in the first quarter of 2021 that more companies are leasing smaller offices with shorter-term leases of two years or less. “People are becoming cautious about leasing,” said Yun.

Industrial warehouse and land, however, remain bright spots for commercial, Yun noted, showing an increase of 2% and 3% respectively in sales volume year-over-year in the first quarter of 2021.

Overall, Yun forecast GDP growth of 4.5%, job gains of 4 million, and consumer price inflation of 2.7% for 2021. He also predicted vacancy rates of 6.2% for multifamily, 4.8% for industrial, 13.0% for retail, and 16.7% for office for the year.

John Worth, executive vice president for research and investor outreach with Nareit, shared Yun’s optimism on the outlook for commercial real estate in 2021, noting that REIT funds invested in the relatively new sector of digital real estate, which includes cell towers, data centers, and logistics facilities, have performed particularly well. “This is not our parents’ or our grandparents’ commercial real estate,” Worth said. “CRE is changing as the economy changes.”

Worth noted, as Yun did, that telework is impacting office vacancies and causing companies to re-evaluate their use of office space. “I think work-from-home is going to be the single largest outstanding question for commercial real estate coming out of COVID-19,” said Worth.

However, he also maintained that there is a lot of potential in office, predicting a rebound in the sector after a period of experimentation, during which companies try out different ways to organize office space and employees. “One thing a lot of organizations are going to learn is that it’s critical to get younger employees who need to build relationships together in a physical space,” he said. “I am very bullish on the prospects for the future of offices.”

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Opportunity zones—federally designated areas that are ripe for investment and revitalization—are benefiting from the housing boom, too, as they see prices increase to the likes of more affluent places. In the first quarter of 2021, 75% of opportunity zones with sufficient data saw median home prices rise annually. Two-thirds of them saw prices rise by at least 10%, according to a new report from ATTOM Data Solutions.

Opportunity zones were established by Congress in the Tax Cuts and Jobs Act of 2017. They offer investors a chance for tax breaks in exchange for making long-term investments in the revitalization of low-income federally designated neighborhoods nationwide.

“Some of the country’s poorest neighborhoods continued riding the long national boom in home prices during the first quarter of the year, reaping increases that pretty much matched those in more affluent areas,” says Todd Teta, chief product officer with ATTOM Data Solutions. “Those ongoing gains emerged in the latest price data showing values in designated opportunity zones rising at about the same pace, or even more, than in other communities.”

Still, home values inside these zones remain quite low compared to the rest of the U.S., Teta notes. “But they are far from immune from the boom,” he adds. “That shows continued interest among home buyers in marginal areas and continues to bode well for the redevelopment that opportunity zone tax breaks are designed to promote.”

About 43% of the opportunity zones tracked by researchers still had median prices of less than $150,000. A year ago, however,, that percentage stood at 50%. The Midwest continued to offer the highest number of opportunity zone tracts with a median home price of less than $150,000 at 68%, followed by the South (51%), the Northeast (43%), and the West (8%).

The states with the largest percentage of opportunity zones where median prices rose annually during the first quarter of 2021 included: Arizona (where median prices are up 84% year-over-year in these zones), Idaho (83%), Oregon (83%), Nevada (82%), and Michigan (82%).

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The median rent in the 50 largest metros nationwide increased 2.7% year over year, the largest growth since the beginning of the COVID-19 outbreak, according to a new report from realtor.com®. The nation’s largest tech hubs are seeing some of the biggest rebounds in rental prices as more technology firms announce return-to-the-office plans.

The U.S. median rent in April averaged $1,483, the fastest growth since March 2020. Prior to the pandemic, rents were growing 3.2% annually.

Rents for two-bedroom units are seeing the most growth, now surpassing pre-COVID-19 growth rates—up 5.2% annually, realtor.com® notes.

Rents in the largest tech hubs saw prices fall the most in 2020 due to the growth of remote work. Rents in tech hubs are still down 5.4% from a year ago but that marks an improvement from a 6.6% decline in February, realtor.com® notes.

“In tech centers, rent declines are getting smaller, signaling they are on the path to turnaround,” says Danielle Hale, realtor.com®’s chief economist. “If the trend continues, renters could expect to be paying pre-pandemic rates by as early as this fall.”

The median rent in the nation’s largest tech hubs was $2,086 in April, up 1.1% from March. Still, rents continue to be lower in the largest tech centers like San Jose, Calif. (-12.5%); San Francisco (-10.9%); and Seattle (-7.35). But the declines are lessening, researchers note. On the other hand, Denver and Austin, Texas, are leading the rental market recovery among tech hubs. The median rent in Denver is up 2.2% and is up 1.7% in Austin annually.

“Overall, the U.S. rental market is beginning to return to pre-pandemic levels,” says Hale. “With the largest growth occurring outside of major cities, renters are encountering different scenarios depending on the market in which they are searching and size of the unit they are looking for.”

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A new housing development going up in Valencia, Calif., is setting out to be the largest net-zero community in the nation—potentially the world, CNBC reports. More than 21,000 homes will be part of the new community and it will have no carbon footprint.

The development, which is being built by FivePoint(link is external), will include 21,500 homes on 15,000 acres. Major builders like Lennar, Toll Brothers, Tri Pointe, and KB Home will be building in the community, which will include multifamily buildings, affordable housing, and commercial space as well.

To achieve net zero, the homes will have solar panels and have electric vehicle chargers in garages. Each home will have a high-performance attic that aims to reduce the need for air conditioning, heating, and ventilation. All irrigation will use recycled wastewater. The community will have shared electric vehicles—like scooters and e-bikes.

The homes will be priced between $400,000 to more than $1 million. Valencia is about an hour from downtown Los Angeles.

The developers hope the community will serve as a model for other real estate developments in navigating environmental zoning and finding ways to build in a more environmentally friendly way.

“I believe this will be a step forward,” Emile Haddad, CEO of FivePoint, told CNBC. “And our hope is that a lot of people will actually start imitating and start raising the bar higher.”

John Burns, CEO of John Burns Real Estate Consulting, believes it will. “A lot of my clients are saying we’re looking for ESG (environmental, social, governance), and developments like this are going to attract capital, so you’re going to see more people doing developments like this so they can get the capital,” Burns says.

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Investors are growing concerned that it may be more difficult to make money in flipping homes amid a frenzy of home buying activity lately that has sent home prices climbing.

Home flipping profit margins dropped in the first quarter. Only 2.7% of all single-family homes and condos in the first quarter were considered a house flip—transactions that occurred within 12 months of one another. That is down from 4.8% during the fourth quarter of 2020 and 7.5% a year earlier, according to a new report from ATTOM Data Solutions, a real estate research firm.

Gross profits are dropping, too. On the typical home flip—which reflects the difference between the median sales price and the median price paid by investors—gross profit declined nationwide in the first quarter to $63,500. That’s down from $71,000 in the fourth quarter of 2020. Profit margins for returns in the first quarter translated into a 37.8% return on investment compared to the original sales price.

Investors who are still jumping in do appear to be trying to speed up transactions to capitalize on the current market. Home flippers who sold homes in the first quarter took an average of 159 days to complete their transactions, the lowest level since the third quarter of 2013, according to the report.

“It’s too early to say for sure whether home flippers indeed have gone into an extended holding pattern,” says Todd Teta, chief product officer at ATTOM. “But the first quarter of 2021 certainly marked a notable downturn for the flipping industry, with the big drop in activity suggesting that investors may be worried that prices have simply gone up too high. After riding the housing boom along with others for years, they now might be having second thoughts. Whether this is the leading edge of a broader market downturn is little more than speculation.”

The following are additional highlights from ATTOM Data Solutions’ “First Quarter 2021 U.S. Home Flipping Report”:

• Home flipping rates fell in 70% of 108 local markets tracked. The largest quarterly decreases—down by nearly 70% or more— in home flipping occurred in Memphis, Tenn.; Lakeland, Fla.; San Francisco; Columbia, S.C.; and Palm Bay, Fla.
• The largest increases in quarterly home-flipping rates occurred in Springfield, Mass. (up 114%); Albuquerque, N.M. (up 103%); Springfield, Ill. (up 95%); South Bend, Ind. (up 86%); and Boston, Mass. (up 79%).
• Homes flipped in the first quarter were sold for a median price of $231,500, down 3.9% compared to the fourth quarter. This marked the first quarterly decrease in typical resale prices since the fourth quarter of 2018 and the largest quarterly decline since the first quarter of 2011, according to the report.
• The largest quarterly increases in profit margins during the first quarter were in Springfield, Mo. (ROI up 120%); Provo, Utah (up 118%); Omaha, Neb. (up 101%); Lynchburg, Va. (up 101%); and Pittsburgh, Pa. (up 88%).
• The biggest quarterly investment-return decreases in home flipping during the first quarter occurred in Memphis, Tenn. (ROI down 64%); Austin, Texas (down 54%); Houston (down 50%); New Orleans, La. (down 38%); and Louisville, Ky. (down 37%).
• The portion of flipped homes in the first quarter that were purchased with cash by investors rose to 59.2%. On the other hand, about 41% of homes flipped in the first quarter had been bought with financing.

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The demand for warehouse space is at record levels. Retailers are on the hunt for more warehouses to help meet their growing e-commerce needs and fulfill online orders at quicker speeds, according to a new report from JLL, a commercial real estate services firm.

Big box retailers like Walmart, Target, Big Lots, TJX, and Costco are aggressively competing for more warehouse space, trying to catch up to Amazon who has long been buying up warehouses across the country, JLL notes.

“We’ve been on a long-term journey of shifting consumer behavior from buying in stores to online,” Craig Meyer, president of JLL Industrial for the Americas, told CNBC. “That’s the existential driver for demand in the U.S.”

Warehouse demand is notably surging in places like Columbus, Ohio. Industrial real estate demand in Columbus is expected to jump 61% in 2021 compared to 2020, according to JLL. The firm notes that Columbus is an attractive market to retailers because nearly half of the nation’s population is within a one-day drive.

The demand for more warehouses is also reaching record levels in Savannah, Ga., where demand has increased by nearly 10 million square feet over the past year, JLL’s report notes.

As demand surges, rents are rising fast. Industrial taking rents surged nearly 10% in the first five months of 2021 compared to the same period a year earlier, according to CBRE data.

“Momentum in the marketplace is really strong, and this is against a backdrop where there’s very high scarcity in our business,” Chris Caton, head of Prologis, one of the largest firms of logistics real estate, told CNBC. “Vacancy rates in the U.S. are four-and-half percent, basically 40-year lows. There has never been less available to lease, at a time when customers really, really need it.”

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