Commercial real estate surplus could help shortage
Thursday, January 7, 2021 from Floor Covering Weekly
Let’s start with the housing side of this situation. In spite of a dramatic downturn in the economy in the spring, the housing market is booming. Historically low mortgage rates, a large Millennial generation that is finally moving into homeownership and a desire by many urbanites to move to a less dense and safer environment has stoked the housing market. House prices are rising at nearly a double-digit percentage rate annually, and the available inventory of homes on the market is currently at a 2.5-month supply according to the National Association of Realtors. Typically, it is twice that level.
One reason this situation exists is that housing has been undersupplied for a decade now. In the 1980s, the 1990s and the 2000s, we added an average of almost 15 million new homes per decade. Between 2010 and 2019, we added less than 10 million. At present, we need to be adding about 1.5 to 1.6 million homes a year to accommodate new household demand for housing, additional second and vacation homes, and homes lost to the inventory due to natural disasters and other reasons. In spite of considerable pent-up demand from the last decade, we’re still building fewer homes than are needed nationally. This will ensure that house prices will continue to rise and make homes less affordable for low and moderate households looking to purchase.
However, while the housing market is rocketing, the commercial real estate market is in the midst of a steep downturn. That’s not surprising since many workers are working remotely and not going to their offices, and consumers are buying things online and not in stores, not eating at restaurants and not staying in hotels because they are not traveling. As a result, commercial vacancy rates are up, rents are down and the construction of new buildings is well off from levels of the past few years.
While commercial markets are generally weak nationally, major metro areas that historically have vibrant residential neighborhoods — like New York and San Francisco — are seeing even greater weakness as their downtown population flees to more desirable places. In Manhattan, for example, about 14 percent of office space is vacant, and only about 10 percent of office workers are reporting to the office according to the Partnership for New York City. As a result, CBRE reports that commercial rents have dropped almost 13 percent from a year ago. Given this situation, commercial construction activity has dropped sharply. The Real Estate Board of New York recently reported that new building filings declined almost 22 percent through the first three quarters of 2020.
Even with the steep decline in construction levels, real estate professionals feel that there is currently a significant excess supply that could be converted to other uses. The real estate brokerage firm Cushman and Wakefield estimates that there is 140 million square feet of office space in less desirable buildings in Manhattan where conversion to residential uses might be feasible. That alone — even ignoring the opportunities to convert excess retail, hospitality and lodging space — could be enough to create 100,000 to 140,000 housing units. While the hurdles are high to accomplish this sort of adaption of space across the country, it could make a tremendous difference in meeting our national housing needs, and at the same time create a lot of new opportunities for flooring products.
Kermit Baker is the senior research fellow for the Joint Center of Housing Studies at Harvard University. He may be reached via e-mail at [email protected]