During this unprecedented time, it is hard to know how things might change from one day to the next. As data becomes available, CBRE has published regular updates on the Impact COVID-19 is having on commercial markets throughout the U.S. and the rest of the globe. Excerpts from the latest overview for the week ending April 24, 2020 are included below. The full review, along with weekly updates, can be found at www.cbre.com/covid-19.
ECONOMY | OIL CRASH EXACERBATES ECONOMIC DOWNTURN
The deepening oil price crash is one of the more predictable lagged consequences of the COVID-19 crisis. In the medium term, cheaper oil is good for the U.S. economy. In the short term, it will create additional economic headwinds as oil producers invest less and the stock market becomes more volatile. Further steep production cuts in the U.S. should result in the price of West Texas Intermediate returning to $30 per barrel in the medium term. Direct government aid to the oil and gas industry will benefit U.S. oil-producing regions.
Q2 will bear the brunt of economically destructive lockdown policies, but growth will gradually resume in Q3. Nevertheless, the shock to the economy will reverberate for many quarters to come.
OFFICE | LEASING SLOWS, VACANCY EDGES UP
Office markets have remained relatively insulated from the most damaging effects of COVID-19 so far, but signs of deteriorating fundamentals emerged in late Ql. Leasing activity declined by 18% in Q1 and an increasing share of it was in tenant renewals rather than new leases. Overall office vacancy rose by a relatively mild 20 basis points in Ql and absorption was at its lowest level since 2013, as increases in sublease space began to affect various markets. Market fundamentals are expected to deteriorate further in Q2 and likely beyond as the effects of COVID-19 impact the economy more broadly.
FLEXIBLE OFFICE | AN IMMENSE SHORT-TERM CHALLENGE
While some flexible office locations have temporarily closed, those that remain open are experiencing little to no use given shelter-in-place restrictions. Many operators are furloughing or laying off staff and entering rent renegotiations with landlords to remain solvent. Several small flex operators have permanently closed and more closures are expected in Q2. Any new space commitments are expected to be extremely limited to only the most opportunistic operators and likely not via traditional leases, but as partnerships and management agreements.
RETAIL | SHARP DECLINE IN MARCH RETAIL SALES; MORE TO COME IN Q2
While Q1 retail real estate fundamentals were largely unaffected by COVID-19, stay-at-home orders and nonessential retail store closures that went into effect late in the quarter resulted in an 8.7% drop in March retail sales. Q2 retail sales will largely depend on the duration of the shutdown but likely will be hard hit. The effects of closures and nonpayment of rent will lead to lagged weakness in net absorption, availability rates and rent growth in Q2.
INDUSTRIAL | SOLID Q1 REFLECTS STRENGTH OF SECTOR, BUT SLOWDOWN EXPECTED IN Q2