Real Estate Markets Struggle To Adjust to COVID-19

By MICHAEL PATON

According to the most recent forecast from CBRE economics, real estate conditions will start 2021 in a state of flux. Certain sectors will grow strongly, but a full recovery of occupier and investor demand will be held back by the continued influence of COVID-19.

The spring and summer months should see rebirth and renewal of real estate, as a vaccine is widely deployed and further government stimulus drives the economy forward. Industrial and logistical sectors, along with certain alternative sectors like life sciences, cold storage and data centers, have thrived in the COVID era, while others like office, retail and hotels have suffered. With expectations that the COVID crisis may end sometime in 2021, the question will be which of these sectors will be permanently changed and which will return to pre-COVID conditions.

Looking back, according to a Cushman & Wakefield analysis, the first half of 2020 was marked by highly volatile labor markets. Overall employment abruptly fell at the onset of the COVID-19 pandemic, with Westchester County losing almost 75,000 jobs in the first four months of the year. Similarly, the unemployment rate in Westchester County surged to 15.7% by April, recording its highest level on record. Improvements in workforce demand took place in the second half of 2020, with overall employment stabilizing and then increasing bringing the unemployment rate to 7.1%.

In Westchester, Cushman and Wakefield noted that new leasing activity in 2020 plummeted 38.4% from the previous year to an all-time low of 707,913 square feet””42.4% below the five-year annual average of 1.2 million square feet. Sublease transactions increased a notable 143.1% over the last 12 months in the year ending December 2020, with the average transaction size falling 4.7% to 4,185 square feet. The White Plains Central Business District accounted for 33.9% of countywide demand in 2020, which was 14 percentage points higher than the previous year”™s proportional share. The overall vacancy rate increased a noteworthy 244 basis points to 25.1% as a result of sublease space additions. The East I-287 submarket posted the largest overall annual increase in available space, recording a 26.6% year-over-year rise, followed by the White Plains CBD submarket, which posted a 15.9% annual uptick in its overall available supply. With the influx of available space, overall net absorption ended the year in the red, posting about 571,600 square feet of occupancy loss.

Overall average asking rents in the county increased $0.42 per square foot since one year-ago, ending 2020 at $29.28. The West I-287 submarkets overall average rose the most drastically over the last 12 months, increasing $1.00-per-square-foot to $27.73-per-square-foot. The rise in the West I-287 submarkets overall average was mainly attributed by space additions in Valhalla and the Tarrytown markets. Conversely, the Southern submarket”™s average asking price for space fell $0.23-per-square-foot to $28.42-per-square-foot.

On the residential side, Douglas Elliman noted that overheated residential conditions continued during 2020 even after the COVID lockdown ended in late spring. Listing inventory in the final quarter of 2020 fell to its lowest level in 19 years, down 9.2% to 2,551 from the prior-year quarter. The incoming supply of property was unable to keep up with sales”™ torrid pace, which rose 12.8% to 2,651, the highest fourth-quarter sales on record. As a result, all price trend indicators saw double-digit gains. The median sales price countywide rose year over year by 15% to $575,000, the second highest on record.

Record low mortgage rates have continued to amplify the significant supply shortage and fuel price growth in the residential market. As a result, the pace of the market was the fastest since 1994. Months of supply””the number of months to sell all listing inventory at the current sales rate””accelerated annually. These metrics are consistent with the volatility of the residential market. The market has continued to disproportionately benefit from New York City”™s outbound migration and reliance on remote work capabilities. It is unclear if this trend will continue if the pandemic wanes.

About the author: Michael J. Paton is a portfolio manager at Tocqueville Asset Management L.P. He joined Tocqueville in 2004. He manages balanced portfolios and is a member of the fixed-income team. He can be reached at (212) 698-0800 or by email at MPaton@tocqueville.com.