On January 13th, Graaskamp Center Director Mark Eppli (PhD ‘91, MS ‘84, and BBA ‘83) presented the “2021 Real Estate Outlook” as the fourth installment of the Graaskamp Center Virtual Leadership Series. Irgens Executive Director Michael Brennan introduced Eppli after covering the recent milestones and accomplishments of the Wisconsin Real Estate Program, including an update on its #1 ranking as the Public Real Estate Program by US News & World Report.
Eppli began his presentation by highlighting the impacts of the COVID-19 pandemic on real estate markets. He drew differences between the financial recession and the pandemic, while noting that we are not currently in a recession, because we have not seen two consecutive quarters of negative growth. The pandemic can be likened to a natural disaster and the response to 9/11, as these events similarly are not caused by financial distress. Eppli anticipates a V-shaped recovery that may come with a tail caused by continuing lockdowns.
Eppli then dove into the role of fiscal stimulus in property markets. Fiscal stimulus, specifically GDP growth, is an important predictor of NOI growth. The nearly $13,000 per capita deficit spending, that grew significantly due to COVID relief, has boosted personal income and revived consumer spending.
Wealth concentration will also play a role in how real estate recovers from the pandemic. Eppli explained that the bottom 50% of individuals by net worth hold only 2% of the total net worth in the US. This wealth concentration could likely hinder many individuals from purchasing a single family home, and will turn eyes to the multifamily market. The pandemic has also unevenly impacted employment by sector and race, as the hospitality industry and minority workers have been hit the hardest, and manufacturing jobs have soared above 2019 levels. He concluded his discussion of the fiscal stimulus impacts of COVID by emphasizing the shift of consumer spending from retail to e-commerce, and noting that middle America home values have grown the fastest YOY.
Eppli then shifted to the role of monetary stimulus on capital markets. The Federal Reserve’s quantitative easing and forward guidance on interest rates have enhanced growth. The Fed’s projections of economic factors like GDP and unemployment have optimistically improved since last quarter. Even so, there is still fear among individual and institutional investors. Though equity capital awaits opportunity, net new origination volumes are falling, with the exception of Freddie and Fannie. This is driven by tightening bank lending standards and fewer loans demanded. Eppli notes that real estate lending lags the economy and anticipates demand to recover in 2021Q3-4.
By sector, troubled lending has increased in retail, hotel, and to some extent, in the office sector. This is echoed by steady cap rates in these industries, while apartment and industrial cap rates have fallen in 2020. Transaction volume has also fallen most extremely in retail and hotel in contrast to industrial and apartment, leading to a K-shaped recovery. Eppli then noted that there is uncertainty on where office will fall in this recovery.
To conclude, Eppli summarized his outlook by reiterating his three main points. The global pandemic is not driven by the same factors as a financial recession. GDP and job growth will struggle in 2021Q1-Q2, but pent-up demand will jump start 2021Q3-Q4. And finally, expect a K-shaped real estate property and capital market recovery.
We thank those who joined Mark Eppli and the Graaskamp Center for our Virtual Leadership Series. We hope you can join us for these upcoming events:
- February 10: Vallabh “Samba” Sambamurthy, Dean of the Wisconsin School of Business
- March 10: Cia Buckley Marakovits, CIO, Partner, Managing Director, and Member of the Investment Committee, Dune Real Estate Partners
- April 14: John Brady, Managing Director and Portfolio Manager, Oaktree Capital
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