CCIM Feature

What a Difference 6 Months Make

As the U.S. looks for a robust economic recovery throughout 2021, the country and commercial real estate face challenges in worker shortage, inflation, and foreign nations’ vaccination efforts.

At the beginning of the year, my annual outlook included some wisdom from baseball’s famous philosopher, Yogi Berra, that still makes economic sense, including “It ain’t over until it’s over” — especially after looking at 1H2021 fiscal and monetary policy. Congress is proposing even more stimulus legislation later this summer via an infrastructure bill, despite a record 8.1 million job openings and a drop in the unemployment rate from 14.8 percent in April 2020 to 5.8 percent June 2021, according to the U.S. Bureau of Labor Statistics. Additionally, the U.S. Federal Reserve is still engaged in a near-zero interest rate policy and $120 billion per month in bond purchases. Coming into 2021, I advised commercial real estate professionals to keep an eye on two macro-events and three forward-looking metrics. 

The two macro-events were the resolution of the November 2020 elections — particularly the runoff elections in Georgia for two Senate seats to decide control of the upper chamber — and vaccination rates. Regarding the first event, we know the November 2020 elections are still a source of debate and divide that only time and future elections will hopefully resolve. In the interim, the stock market isn’t rattled, as evidenced by more than two-dozen new highs in the first half of 2021. With regard to vaccinations, a lot has been accomplished, enabling 49 of 50 states to reopen with resumption of normal economic activities, while Hawaii waits until 70 percent of its population is vaccinated. 


The three metrics I recommended in January to gauge whether economic normalcy could resume in 1H2021 were vaccination rates according to Becker’s Hospital Review, the Transportation Security Administration’s passenger count, and Kastle’s Back to Work Barometer.

Vaccination Success. In January 2021, most states struggled to receive sufficient vaccine doses to inoculate residents, and the logistics to administer the doses in the respective states wasn’t what could be deemed a success. Fast-forward to June 2021 and compare the dosage rates to the first week of January. The percentage of distributed doses improved measurably from a range of just 18 to 31 percent to 77 to 88 percent. Overcoming the vaccination logistical hurdles enabled the U.S. to achieve a fully vaccinated ratio of 50 percent, with 65 to 75 percent achievable before the onset of the 2022 flu season. In my annual outlook, I prognosticated that a vaccination ratio of 50 percent or more would lead to all states reopening and the resumption of a normal economy. That metric has been cleared.

Resumption of Travel. COVID-19 shed a light on how essential the travel industry is to our economy and overall GDP. According to the World Travel & Tourism Council, the travel industry accounted for approximately 11 percent of U.S. GDP in 2019. In 2020, though, the travel industry declined by 42 percent, to less than $700 billion in gross revenue, a drop of $500 billion from a $1.2 trillion annual level. The TSA’s passenger count data perfectly illustrates this impact. Travel through U.S. airports plummeted from 2.2 million passengers per day before COVID-19 to just 85,000 a day in April 2020.

Compare the accompanying charts from January 2021 (520,117) and June 2021 (2,097,433) to see how the travel industry has recovered. The U.S. travel industry, except for the cruise ship sector, is essentially back to a daily passenger count that approximates pre-pandemic levels. Although a disproportionate amount of this travel is currently for leisure to satisfy pent-up demand for vacations, weddings, graduations, family reunions, and the like, the business travel segment is also starting to return. The major airlines are reporting in their latest earnings reports that business travel is now approaching 20 percent of total bookings. The only wrinkles in the experience are a lack of TSA workers at airports and rapidly rising airline ticket costs (up 50 percent or more in recent months). 


Getting Back to Work.
Unlike vaccinations and airline travel, the metric on returning to the office is not so good. Kastle Systems tracks card swipes to access office buildings as well as other property types. The data shows that we are not rushing back to the office — and that a more structural change to work is underway, suggesting lasting impact on the office property type. Kastle’s Back to Work Barometer indicates that vaccinations have not encouraged people to return to the office like they are to airline travel. By June, less than 30 percent of us had returned to the office on a regular basis.

In addition to the anemic response to returning to the office indicated by Kastle, corporate announcements and studies suggest that many of us are not going to use or occupy office space like we did pre-pandemic. For example, on June 9, Bloomberg reported Facebook will expand remote work. The tech giant said it will let all employees work remotely even after the pandemic if their jobs can be done out of office — but they may reduce pay if a worker moves to a less expensive area.

Additionally, a handful of recent studies examined expectations from both employee and employer perspectives:
  • A Spring 2021 Citrix poll found that over a third of workers expect that their employers will embrace and encourage more remote work. Approximately 28 percent plan on looking for a new job that allows remote work.
  • An April survey from Mercer found 76 percent of companies will continue to allow flexible work in the short term, and 43 percent of companies will continue with remote work.
  • Mercer also found 54 percent of employers plan on expanding or increasing flexible work options when the pandemic is over.

Forecasting 2021 and Beyond

There are three primary challenges for the second half of 2021 — primarily inflation, along with workforce shortages and rapid price increases for real estate. 

For decades, the Federal Reserve has worried more about deflation than inflation, following the 1998 CMBS market disruption that affected commercial real estate and then the 2009 Great Recession that saw home prices decline for the first time since World War II (by anywhere from 25 percent to 50 percent). My question is: Has the Fed forgotten how to recognize systemic inflation? Or do we have a vaccinated version of inflation the Federal Reserve is now labeling “transitory inflation?” I fear we have systemic inflation. While I hope I’m wrong, a look back on history may be enlightening.

It’s easy to draw a parallel between what we are facing today with what the U.S. confronted a century ago. After enduring World War I and a global pandemic in 1919 that killed millions, we entered the Roaring ‘20s. If we take this comparison a bit further, it’s important to remember how that decade ended — with the Great Depression and 10 years of economic strife that took decades to recover from. Nobody wants to revisit the 1930s and ‘40s. To make matters worse, tariffs were the spoiler that led to more systemic economic problems. And then, like today, asset prices (stocks and real estate) soared beyond sustainable levels, and we lacked structural safeguards (like the FDIC) to halt an economic crash. Today, stocks and real estate prices are soaring like they did in the 1920s, and once again there are disconnects and a lack of safeguards on entities like the Federal Housing Finance Agency (FHFA). 


There are warning signs right now, and the Fed and Congress are masking them with reckless monetary and fiscal policy that is undermining the value of the U.S. dollar and forcing rotation of capital out the risk curve, inflating prices to levels that don’t make sense. This situation is potentially leaving our most economically ill-prepared generation (millennials) at risk to hold the bag and a tax burden for the losses from our most populous generation (baby boomers). What could upset this delicate balance we are enjoying today? Inflation. And if it’s systemic inflation, price increases would be embedded across market sectors and commodities. 

For more on the potential impact of inflation on the national economy, watch K.C. Conway's July 2021 update.

For an understanding of this scenario, don’t think of the 1930s. It’s time to flash forward to the 1970s, when reckless deficit spending to fund the Vietnam War — later masked by “price controls” under President Richard Nixon’s administration — detonated with an oil embargo and ensuing energy crisis that spread throughout the economy, resulting in a 21 percent prime lending rate in 1981. 

There are parallels to 2021. Substitute untamed deficit spending, reckless monetary policy, and a pandemic in place for the Vietnam War deficit spending, an OPEC oil embargo, and a resulting energy crisis — you have all the ingredients for a 1970s-type systemic inflationary cycle. If you think this scenario is far-fetched, reflect for a moment on three items:

  1. Fed Spending. Note the growth of the Fed’s balance sheet — from $1 trillion preceding the Great Recession to $4 trillion by 2014 and then to today’s $8 trillion, created mostly over the last 12 months in reaction to COVID-19. The dollars used by the Fed to expand its balance sheet are printed money by the Treasury, and better described as incendiary inflationary currency. 
  2. The U.S. Deficit. The federal government debt now stands at $28.2 trillion, well above a 100 percent debt-to-GDP ratio. Congress has allocated more than $5 trillion in stimulus to help the economy through COVID-19 — and more deficit spending is ahead. Congress is debating an infrastructure bill that could be in the trillions. The U.S. budget deficit FYTD passed the $2 trillion mark in May, despite record inflows of tax receipts that surpassed $464 billion in May (the second highest on record, according to CNBC). So how much debt is too much? When does the rest of the world quit funding our deficit spending? We could be close to getting answers to both those questions.
  3. Rising Asset Prices. Whether its stocks, homes, autos, or any commodity, we are experiencing double-digit price increases. The latest CPI (Consumer Price Index), PPI (Producer Price Index), and PCE (Personal Consumption Expenditures) all show 5 percent to 6.6 percent YOY inflation — rates similar to what was experienced in 1977-1981. 

And if these figures are not sufficient to germinate concerns about inflation, reflect on real estate prices. According to the National Association of REALTORS®, the sales price for the median existing single-family home rose to $319,200 in May, registering an annual increase of 16.2 percent — a record high according to records dating back to 1989. And this increase was not just in a few MSAs — 89 percent of MSAs recorded double-digit increases, according to NAR. 

And it’s not just home prices. Commercial real estate prices are setting new records that range from $362,000 per unit for an apartment complex in Denver brokered by JLL in June for institutional owner Nuveen to sub-5 percent cap rates for industrial warehouses in secondary MSAs. The rapidly rising new construction costs are driving up the prices for not only new construction but existing properties. Even hotel properties are seeing the elimination of appraisal reductions, as well as occupancy and rental rates similar to those of the pre-COVID-19 era. Inflation is everywhere, and it won’t abate in the next two to four quarters. 

Key CRE Sectors

While we wait and see how remote work will change expectations for the office sector, urban, high-density office assets are going to face distress in the coming two or three years because businesses and individuals learned to remain productive while working remotely. This transition could lead businesses to open satellite offices in suburbs while reducing downtown office footprints. Additionally, secondary cities like Nashville, Tenn., and Salt Lake City could benefit from companies hiring labor in markets outside New York, Los Angeles, and San Francisco.

If the demand for office in primary markets declines, other sectors could be affected as workers look to live in suburban or secondary city locations with a more beneficial cost of living. These trends will then impact retail, multifamily, and other markets.


An early beneficiary of the reopening economy was the hospitality industry. Hotels, rental car outlets, and airlines have welcomed a booming leisure travel sector. But the hotel sector is a bit bifurcated because business travel is still lagging. Questions remain whether conventions, meetings, and trade shows will return and when. The lag in business-related travel will persist in 2H2021. 

Specifically for retail, the e-commerce boom isn’t going away. As many big-box stores are closing, for example, these sites are becoming e-commerce warehouses in some cases. Retail bankruptcies will continue, but companies like Walmart, Home Depot, and similar brands could do exceptionally well in the post-COVID-19 economy if they can figure out a buy-online-and-pickup-in-store model that can compete against Amazon without requiring rezoning to repurpose dedicated parking. 

Restaurants will also see lasting changes. For dine-in locations, what will the shift to outdoor dining mean in the coming years? Many people realized this option was pleasant — and not just because of social distancing guidelines. Delivery and take-out are two other variables that could remain larger portions of a restaurant’s revenue, which could reduce the importance of inside dining space. Will the Chick-Fil-A model mean that thousands of Yum Brand restaurants close and relocate to larger 1.5- to-2-acre sites that can accommodate multiple drive-thru lanes? For casual dining, we could see a massive redevelopment opportunity for legacy half-acre to one-acre restaurant sites. Increased demand means a McDonald’s or Taco Bell can’t make it on a single drive-thru lane. They need to look at sites that are more than one-acre in size. This change is a major opportunity for commercial real estate professionals to help these businesses replace sites that are functionally and economically out of date. Dust off your skills with Site To Do Business to perform site selection analyses for national chain restaurants. Do you know where “leakage” is occurring in your Site To Do Business Community Profiles? 

Reading Tea Leaves

The impact of COVID-19 will continue to be felt for years to come. For CRE professionals, this tumult can also be an opportunity. CRE professionals focused on the office sector may be called upon by tenants and office property owners to transition their office needs from one centralized site to various locations. Retail will continue to change and evolve to adapt to the transition from a shop-and-take-home economy to an order-online-and-deliver-to-me economy. And with respect to multifamily, we just don’t yet know what we don’t know until the rent forbearance and stimulus programs end. Like office, the opportunity in multifamily is likely in the suburbs and secondary MSAs where the remote workforce will settle out. Analyzing markets to answer these burgeoning issues are among the opportunities for industry pros to position themselves as essential advisers to existing and new clients in 2H2021 and 2022.

For more on this topic, check out the member-exclusive webinar playback of 2021 Commercial Real Estate Outlook featuring CCIM Institute Chief Economist K.C. Conway located in the Members Only section of 

K.C. Conway, CCIM, MAI, CRE

K.C. Conway, CCIM, MAI, CRE, is CCIM Institute's chief economist. 

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