For multifamily, office landlords, worst is yet to come: Moody’s

2021 forecast predicts trouble for some CRE sectors

(iStock/Illustration by Kevin Rebong for The Real Deal)
(iStock/Illustration by Kevin Rebong for The Real Deal)

For landlords across different commercial real estate sectors, Moody’s Analytics has some potentially distressing news: The worst may be yet to come.

A new report by the economic research firm looks at the state of commercial real estate in the wake of the pandemic, and what to expect in 2021. The report looks at four CRE sectors — multifamily, office, retail and industrial — and while there are some reasons to be optimistic about the year to come, more distress is on the horizon.

“Though there is distress on the income side, with landlords and owners having to deal with deteriorating rents and occupancies, there is much less recorded distress on the pricing side, as fewer owners are pressured to sell,” Victor Calanog, chief CRE economist at Moody’s Analytics said in a statement.

Multifamily is one area where more trouble is possible: Rents declined substantially in many major markets in 2020 — notably by 15 percent in San Francisco and 12 percent in New York — and the vacancy rate hit 5 percent by the end of the year. It’s expected to top out around 6.5 percent next year, and with eviction moratoriums expiring, some tenants may not be able to pay back rent owed — which leads to trouble for landlords who rely on those payments for operational expenses.

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But pandemic-related construction stoppages helped the sector; just over 150,000 units came online throughout 2020, a 43 percent decline compared to the firm’s forecasts in the fourth quarter of 2019. The lack of supply glut may be temporary, though, with 200,000 units expected to come online in 2021.

When it comes to the office sector, the national vacancy rate rose from 16.8 percent in 2019 to 17.7 percent. Vacancies are expected to continue to rise to what Moody’s Analytics says will be “near-record levels” by 2024, at which time it believes the rate will slowly go down. It expects effective rents to fall by about 7.5 percent this year, but the firm says it has revised its forecast for the coming year — to “less severity” in the short term, according to the report.

And for retail, Moody’s Analytics said that the lockdown accelerated the trend of shoppers pivoting to e-commerce, with the report noting that the jump in online shopping throughout the second quarter alone represented “about a decade’s worth of evolution compressed into a couple of months.”

The report notes that some property types performed better than others, namely retail centers that have grocery stores or pharmacies as their anchors. Malls, however, had a 10.5 percent vacancy rate at the end of the year — a historic high.

Unsurprisingly, the industrial sector — cited by many experts as the one bright spot for CRE amid the pandemic — performed well, by Moody’s Analytics’ metrics. The national vacancy rate for warehouse and distribution properties declined in the fourth quarter to 10.5 percent, despite 140 million square feet of new space coming online. Rents, meanwhile, went up, suggesting more resiliency going into 2021.