Theobald 2021 transaction volume

Walker & Dunlop: U.S. Economy Displays Long-Term Signals for Recovery, Growth

by Sarah Daniels

Back to Normal?

The U.S. economy has improved significantly since April 2020, the peak of the pandemic-induced recession. The national unemployment rate stood at 6.0 percent in March of this year, well below the peak of 14.8 percent in April 2020. Companies were effective in implementing work-from-home technology, keeping unemployment rates for office-based service sectors relatively low. For those with a bachelor’s degree or higher, unemployment rates were only 3.7 percent as of March 2021.

In 2020, third-quarter GDP growth made up much of the second-quarter losses, followed by 4 percent annualized economic growth in the fourth quarter. Retail sales also rebounded quickly, returning to pre-pandemic levels by June and continuing to increase through the beginning of 2021.

However, the U.S. economy is still far from “normal.” Of the 22 million people who lost jobs in March and April 2020, only 57.8 percent had regained employment by March 2021. Stronger growth should return jobs to industries hit hardest during the pandemic. In March of this year, restaurants and bars added 176,000 jobs; arts, entertainment and recreation venues added 64,000 jobs and accommodations added 40,000 jobs. Still, employment in the overall leisure and hospitality sector is down by 3.1 million, or 18.5 percent from February 2020.[1] Other than a minor surge around year-end holidays, air travel has minimally improved over the past three months. As of mid-February, TSA throughput travel in the United States remains down by 57 percent from a year ago.[2]

The good news for the hospitality sector is twofold: the availability of an effective vaccine followed by a slowdown in COVID-19 cases throughout the United States and globally are listed as the two most important factors influencing traveler decisions.[3] New COVID cases in the United States are down, and with broader vaccine availability expected, travel plans should increase soon. Still, as mentioned above, flight plans are relatively unchanged. Hospitality stocks have already started to recover, with REITs posting a 72.3 percent total return from November through mid-February.

Office owners are taking steps to make safer workplaces in order to entice employees back into the office. An ongoing survey of how frequently office security passes are used shows that in ten of the largest cities in the country, only 24.7 percent of office workers were back in the office as of mid-February.[4] Texas metros lead the way with more than a third of office workers back, but San Francisco and New York are lagging, with only 13 percent and 15 percent of workers back in the office, respectively.

Retail Is Not Weak — It’s Just Changing

Interestingly, some retail sectors have been the biggest job creators over the past year. With more people at home, Americans have changed some of their habits, including how they purchase things. The biggest job creators, each creating more than 100,000 jobs since last January, were warehouse clubs, couriers and messengers, building/garden stores and warehouses. Americans focused on eating at home in 2020; food & beverage stores (e.g., grocery) created more than 100,000 new jobs after March 2020. Overall, real personal consumption expenditures on goods increased by 7.0 percent year-over-year in of the fourth quarter of 2020. Of course, a good portion of spending switched to online purchases. Non-store and electronic shopping purchases increased by 24 percent year-over-year in 2020. This method of shopping now comprises 29 percent of all retail sales, accelerating the previous online shopping trend and now surpassing the market share of general merchandise, apparel, furnishings and other retail sales (GAFO), a proxy for shopping-center-type sales.[5] It is yet to be seen how much, if any, of this trend will reverse after the pandemic ends, creating uncertainty for retail property owners.

Low-Cost Apartment Markets Benefit

Across all markets in the United States, there was a trend of tenants leaving large, high-cost cities such as San Francisco, San Jose, Los Angeles and New York, with many tenants heading to more suburban areas in search of more space.

Most apartment markets remain healthy. Apartment vacancy rates reflect a robust construction pipeline, which increased total stock by 3.8 percent, or 372,000 units, in 2020. Alternatively, vacancy for stabilized properties is under 6 percent. Rent collections as of March remain high at 95.9 percent, down slightly from 97.2 percent a year ago.[5]

Low-cost markets such as Dallas, Atlanta and Houston led demand in 2020, each absorbing more than 10,000 units. The South/Southeast exhibited strong demand in markets such as Charleston, Charlotte, Jacksonville, Raleigh and San Antonio. However, even some of the harder-hit markets in 2020 began to turn the corner in early 2021. In the city of San Francisco, for example, effective rents stabilized, and net absorption turned positive as of mid-February as new vaccines gave hope of urban reopening and tenants took advantage of low rental levels that haven’t been seen since 2012.

Effective U.S. apartment rents held relatively flat in the second half of the year. Class B rent growth increased by 1.4 percent in 2020, while Class A properties experienced slight rent declines, reflecting the large construction pipeline. However, performance varies significantly by market. Effective rents increased by 3 percent or more in 2020 in many markets, including several in the Midwest.

The apartment market will need to continue to exhibit strong demand going forward as the construction pipeline remains robust. While down from a peak a year ago, another 474,000 units are under construction, equivalent to 4.6 percent of total stock. Nearly 80,000 units under construction are located in New York and Los Angeles. Other markets with robust construction pipelines include Dallas, Seattle, Phoenix, Houston, Washington, D.C. and Boston.

Apartment sales volumes peaked in 2019 but began to rebound towards the end of 2020, topping $32 billion in sales, down by only 4 percent from the previous year. As of the first quarter of 2021, sales volume over the past year remains down by 39 percent from a year ago but is likely to begin an ascent during the Spring season. Prices have held fairly steady, however. The average sales price per unit at $165,182 over the past year is up by 0.8 percent year over year as of the first quarter. Similarly, average cap rates at 5.3 percent in first quarter 2021 were down by 10 basis points from the previous year. Central Business District cap rates, averaging 4.8 percent in the first quarter, were up 10 basis points year-over-year, while suburban cap rates at 5.4 percent were down 10 basis points year-over-year. Ten-year treasury yields increased by over 100 basis points from historically low levels in early August 2020, bringing the cap rate spread to treasuries back to near the ten-year average level by the first quarter of 2021.

Multifamily Originations Expected to Increase

Expectations are that commercial real estate transaction volume will increase by 25 percent in 2021 and another 20 percent in 2022. Given improving economic conditions, low interest rates, balanced apartment market and wide cap rate spreads to treasury yields, apartment market sales are expected to continue to increase in a similar fashion. Walker & Dunlop reviewed multifamily loan maturities, delinquencies, construction pipelines and sales trends to identify potential impacts on multifamily loan originations. As shown in the table below, multifamily loan originations are expected to increase by 3 percent in 2021, then an average of 11 percent per year in 2022 to 2024.

Multifamily loan originations expected to increase by 3 percent in 2021, then an average of 11 percent per year in 2022 to 2024.

The Path Forward

While the economy has made many positive rebounds, “normal” isn’t quite here. Schools have yet to fully reopen nationally, and the government has struggled to accelerate the vaccination rollout. Over 9.6 million people who were employed a year ago still remain unemployed. Most concerning is that the pandemic impacts clearly differentiated between upper-income households, that were minimally impacted (at least economically), and lower-income households, many of whom remain unemployed. Government will need to prove its effectiveness both in restoring economic conditions and international trust, as well as restoring at least enough political unity to be productive.

Biden’s American Rescue Plan promising $1 trillion in spending this year and $3 trillion set aside for infrastructure and energy spending — on top of the trillions that have already been spent by the government on coronavirus relief — raised questions of inflation by some economists in March as the economy begins to reopen. Low unemployment rates could further drive spending, creating a near-term pricing issue as production of goods (which in some cases was slowed by both the virus and transportation issues) catches up. March inflation was up by 2.6 percent year over year, the fastest pace since 2018. However, it should be noted that surging oil prices were the primary cause, as inflation other than food and energy was up by only 1.6 percent year over year. General expectations are that inflation will remain moderate at just over 2 percent for the rest of the year,[6] although some expect a summer spike that could reach up to 3 percent. That level of inflation hasn’t been seen since 2012.

As mentioned, we aren’t at “normal” yet, and many believe that the normal we settle into won’t be as it was before. With the vaccine rollout continuing, both the housing market and the overall economy will welcome a “new normal.” Businesses and consumers will see some pandemic-instigated trends remain while others evolve.

 By Steve Theobald, executive vice president and chief financial officer of Walker & Dunlop. Walker & Dunlop is a content partner of REBusinessOnline. For more articles from and news about Walker & Dunlop, click here.



[3] MMGY Travel Intentions Pulse Survey Results for December 2020


[5] “ULI Real Estate Economic Forecast, A Survey of Leading Real Estate Economists / Analysts”, October 2020

[6] Philadelphia Federal Reserve Bank, Survey of Professional Forecasters, First Quarter 2021

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