Gov. Newsom’s Economic Reopening Announcement Isn’t The Defining Moment CRE Needs

https://www.bisnow.com/san-francisco/news/commercial-real-estate/california-june-reopening-might-mean-choppy-waters-ahead-108468

April 9, 2021 Bianca Barragán and Jacob Bourne

After having the physical and social scope of their lives drastically diminished for over a year, Gov. Gavin Newsom’s announcement that the state may undergo a full economic reopening on June 15 could signal to Californians that it is time to celebrate.

For commercial real estate, that could manifest in people flocking to restaurants and shops, staying in hotels, signing office leases and kicking off tenant improvement projects. But dreams of smooth summertime sailing could be tempered by some real-life rough patches.

Before the pivotal date arrives, state and local officials will have to determine that there is enough vaccine supply to meet the demand of those eligible within two weeks of an appointment being scheduled. Plus, hospitalization rates need to remain low. Meeting both of those criteria could be derailed by a wave of coronavirus mutations currently spreading through the Northeast and Midwest, leading to calls for additional vaccine supply, as reported by The Washington Post.

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Yet, even if California passes the reopening test, the subsequent parties being planned by JLL Executive Managing Director Chris Roeder’s younger colleagues will definitely be masked, he said, adding that the hospitality and restaurant industries should bounce back quickly. However, a resurgence of such activities requires the labor force to be ready and willing to work.

Although retail and restaurant leasing is strong and traffic has picked up at the City Center Bishop Ranch shopping and entertainment center in San Ramon, Sunset Development Co. Senior Vice President of Retail Jeff Dodd said that the Bay Area’s already challenging labor market was further complicated during the coronavirus pandemic with unemployment checks enhanced by federal subsidies disincentivizing people to return to work. California unemployment claims hit a three-month high during the week ending on April 3, as reported by The Mercury News.

However, the unemployment collections may have also allowed some retention of workers who otherwise would have moved in with relatives or sought jobs in other industries.

“You have to go back to work eventually,” Dodd said. “At this point it looks like the light is clearly at the end of the tunnel, so I think that people need to take the jobs when they can get them.”

Colliers Executive Vice President Dave Sandlin said that the reopening will be a big deal for the office market, especially in downtowns that have been largely vacant during the past year. However, the defining moment for the office market will be when the big tech companies tell employees that it is time to repopulate the workplace, Sandlin said.

Hotel occupancies, devastated by the pandemic’s onset, could be reinvigorated by the lifted restrictions. Like retail, the gradual, tiered approach to California’s reopening means that on June 15, businesses won’t be starting from a dead stop, but instead will be taking the next step in returning to a semblance of normalcy. There is already evidence of this taking place.

Over roughly the last month, hotels in “drive-to” markets along the Central Coast and beach areas of Orange County and San Diego have seen immense demand — a trend expected to hold steady post-reopening, Atlas Hospitality Group President Alan Reay said. The hotels that have lagged behind so far, and continue to do so, are those business travel- and convention-reliant hotels. For those hotels, the June reopening might not make that much of an initial impact, considering limits on convention attendance.

Still, Reay said he is optimistic that the state’s hotel industry is starting to solidly rebound, but he did caution that the real test was still ahead.

“Now the question is, is the rebound going to last, or is it because people have been stuck at home for the last 12-15 months and they need to get out?” Reay said.

The picture for life sciences seemed less up in the air. Pre-pandemic, the industry was building momentum. It held that forward movement during the pandemic, moving to center stage in the rush to create a Covid-19 vaccine. Post-reopening and in the longer term, the sector is expected to continue its steady growth in the state, industry watchers say.

“Life sciences is obviously a highly specialized industry,” said Amber Schiada, director of research for the Southwest region at JLL, noting that it is not a huge CRE sector in terms of the overall market. “It’s not going to take over the world, but it’s going to continue to be a very important field.”

The reopening could result in a surge in cold-chain demand, some anticipate. New food-buying habits borne out of the pandemic will collide with pre-pandemic grocery shopping habits and a summertime rush to restaurants and bars and other out-of-home food and drink destinations. Whether there’s sufficient cold storage to support the expected surge in demand is a question that industrial professionals are asking right now, Cushman & Wakefield Executive Director Kevin M. Turner said. If the anticipated demand materializes, it would be a boon for the market.

“Industrial stakeholders will be a direct beneficiary of this restart in 2021,” Turner said.

The proposed reopening won’t likely have a direct impact on the multifamily market, but the reopening’s effect on employment or whether people will want to be closer to their offices again would, Bloomberg Senior REIT Analyst Jeffrey Langbaum said.

Assuming the conditions that led to the loosening of pandemic restrictions continue, Langbaum said he expects to see vacancy in larger cities that saw occupancy drops getting absorbed, possibly enough to return pricing power of apartments to REIT landlords, who have often had to make concessions to attract tenants throughout the pandemic. When that will happen depends on what comes after the reopening.

“In order for that to happen, the whole economy has to open fully — employers have to come back to the office, retail has to reopen,” Langbaum said.

Among other reasons why workplaces reopening might trail the June 15 milestone by weeks, if not months, is that with schools still closed, other programs for children such as camps may not yet be reinstated to fill the gap.

“There’s still a lot in flux and the summer is going to be choppy for that segment of the workforce so you may not see a mass return on June 16 where everyone is back to normal because people are still dealing with home issues with childcare,” JLL Managing Director Bart Lammersen said.

Then there are workplace modifications companies may make in response to hybrid remote work models and social distancing necessitating tenant improvement projects. The timing of such work could be complicated by procurement issues for construction materials.

Despite these challenges, many in commercial real estate see better days ahead for the industry with the optimistic outlook further justified by the targeted June 15 reopening date.

“I believe the second half of this year we’re going to have a very good recovery — we just need to get more shots in the arm,” Sandlin said, adding that people are inherently social and will want to be relieved of isolation as quickly as possible.

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