US Regional Real Estate 2021

The new US Regional Real Estate 2021 guide features 16 jurisdictions. The guide provides the latest legal information on the impact of COVID-19 and US tax law changes, real estate finance, planning and zoning, investment vehicles, commercial leases, construction, and income tax withholding for foreign investors.

Last Updated: May 14, 2021

Compare law and practice by selecting locations and topic(s)

Select Locations

Select Topic(s)

{{topic.Title}}

Please select at least one location and one topic to use the compare functionality.

Compare

Authors



Greenberg Traurig, LLP has a real estate practice that is a cornerstone of the firm and is a recognized leader in the industry. The firm’s real estate attorneys deliver diversified and comprehensive counsel for property acquisition and investment, development, management and leasing, financing, restructuring and disposition of all asset classes of real estate. The team draws upon the knowledge and experience of more than 400 real estate lawyers from around the world, serving clients from key markets in the United States, Europe, the Middle East, Latin America and Asia. The group’s clientele includes a broad range of property developers, lenders, investment managers, private equity funds, REITs and private owners. The firm’s real estate team advises clients on a variety of matters across a broad spectrum of commercial, recreational, and residential real estate, including structured equity and debt and the hybrids. The firm would like to thank Corey E Light, co-chair of the global real estate practice, for his contribution to this chapter.


US Regional Real Estate 2021 Introduction

In 2020, the COVID-19 pandemic brought public health issues to the fore as a main driver of real estate performance for the first time in recent history.

The health crisis had a great impact on the real estate industry overall, but the effects varied widely among sectors of the United States real estate market. In some cases, the pandemic accelerated trends which were already in play. In other cases, the pandemic initiated shifts in behavior and demand that look likely to have a long-lasting influence on real estate.

Considering the historic domestic political events that coincided with the COVID-19 pandemic and one of the deepest global economic disruptions in a century or more, the US real estate industry proved to be surprisingly resilient in 2020, with the market appearing to rebound after an initial acute shock. From an investment perspective, CBRE estimated US real estate investment volume fell 38% in 2020 but is already exhibiting the start of a dramatic rebound 2021.

Reporting a similar trend, JLL noted that, although direct commercial real estate investment volume totaled USD762 billion in 2020, Q4 2020 saw a 65% investment increase over Q3 2020. Signs of a migration (from high-density urban gateway markets and high-tax environments like New York, Chicago and San Francisco, to Miami and secondary markets, such as Nashville and Austin) resulted in business relocations and increased investment and development interest in Miami and warm weather, low-tax secondary markets. At the beginning of 2021, some of that migration seems to be reversing, as evidenced in New York with accelerated residential rental and sales activity in office rental among tech and new media tenants.

The Industrial Sector

In 2020, an explosive growth in remote shopping resulted in a huge demand for regional and last-mile industrial properties. Early pandemic shortages in critical supplies like PPE exposed a need to revive domestic manufacturing in industries that had become reliant on imports. The industrial sector was already experiencing steady growth and popularity pre-pandemic. The emergent need for logistics space and an impending revival of domestic manufacturing pushed industrial to become the top-performing US real estate sector in 2020. The top 100 US industrial transactions totaled 103.8 million square feet, 17% higher than in 2019, according to CBRE. A record 48 US acquisition transactions for 1 million square feet or more were signed last year, compared to 29 signed in 2019.

As e-commerce and the need for a quantity of safety stock to counter potential supply chain disruptions continued to fuel demand, industrial real estate had accelerating momentum going into 2021. E-commerce’s share of total retail sales is still growing, and with it an unabated demand for US industrial space. Q4 2020 was the strongest quarter on record for the industrial market. A record 104 million square feet was absorbed in Q4 2020, bringing the 2020 total to 223.5 million square feet – 11.8% higher than 2019, according to CBRE. The stage has been set for a bright industrial real estate outlook for 2021.

The Office Sector

Office culture and working environments were already under assessment before COVID-19. Over the past decade, office owners and users had been experimenting with a variety of changes to how workers used and interacted with the office environment. Before COVID-19, co-working, hoteling, hot-desks, open office designs, remote working and single-size offices were among the non-traditional ideas already in various stages of use and implementation, across a number of industries.

A near complete national shut-down of offices accelerated a deeper re-evaluation of traditional office-use habits. Leaders were even asking whether offices had any place in a post-pandemic world. There seemed to be no doubt that the office sector would experience a profound change. The question was whether the change would be seismic or evolutionary.

The acute crisis of 2020 and the uncertainty it caused were reflected in a steep drop in overall transaction volume compared to 2019. Nevertheless, the asset class maintained its place as the largest investment choice by volume in 2020 due to a surge in fourth-quarter transactions.

Office usage moving into 2021

Moving into 2021, there has been continued uncertainty surrounding office use and demand, and how permanent changes will be. Multiple studies report that almost every office user, across all industries, will be incorporating a permanent hybrid working model into their work environment, but little further detail has emerged. A small number of companies, like Salesforce, have announced that they will be office optional. Others, however, notably Google and Amazon, are increasing their footprints in places like New York.

Companies that had previously embraced open plans and shared desks are talking about the need to reduce density by moving into larger spaces to allow for social distancing. There are firms that are exploring hub and spoke offices that will distribute their office workers across a broader footprint and shift many workers out of the large urban cores into multiple suburban locations. While it is inevitable that these ideas will alter the demand for offices, the emerging picture will depend on which of these ideas are embraced, and how widely.

In the future, it would be reasonable to expect a growing demand for higher-quality space, both from a technological and environmental perspective. This will be driven by flexible terms, as demands for hybrid office and work from home arrangements take center stage.

The Hospitality Sector

Among all real estate asset classes, hospitality has experienced the largest drop in transaction volume and lowest share of investment activity. As with the office sector, the lockdowns of the early pandemic disproportionately disrupted the hospitality industry, bringing it to a near complete stop, and the CBRE reported a 37% decline in annual US hotel demand in 2020 compared to 2019. Transactional activity has been largely on hold since the pandemic began, with investors gauging the impact of vaccine deployment and further COVID-19 restrictions.

Even with hotel loans defaulting at a rapid pace in 2020, lenders were patient in exercising remedies for a number of reasons, including a large bid-ask discrepancy in expectations of value and price. Many hotels dramatically reduced operations or shuttered permanently while benefitting from stimulus funds to help weather the storm. Others simply shuttered permanently. Hotels under construction in mixed-use projects were being reduced in size or delayed as the pandemic progressed.

Hospitality industry trends have varied greatly by location and product type. For example, some hotel owners in high-density markets that catered to business travelers are experimenting with conversions to residential, wellness, senior living, memory care and other healthcare uses. Hotels that have remained in operation have implemented many contactless features to address health and safety concerns. The impact on resorts was severe, with many destinations experiencing single-digit occupancies.

Recovery timelines

Some experts do not expect to see a return to pre-pandemic visitor numbers until 2024. With travel bans still in effect and vaccination programs off to a very slow start in Europe, the level of international business and leisure travel into the US remains low. The wide adoption of and improvements in videoconferencing has resulted in many companies cutting back on travel.

Hotel valuations remain in flux. Still, there are investors who are hoping for a quicker recovery of the sector amid an unleashing of supply brought on by more aggressive lenders and the need for cash-strapped owners to re-capitalize or sell. A surprisingly swift US vaccine rollout could accelerate a return to business and leisure travel, and JLL reports that many investors have already planned accordingly.

Starting in 2020, there has been a great deal of activity among private equity funds, high net worth individuals and family offices organizing capital to take advantage of the distressed hotel sector, accounting for a majority of the buyer activity, with 21% of investments amongst these groups aimed towards resort properties, more than doubling the trend in 2019.

Other Sectors to Pay Attention to in 2021

Single family residential (SFR)

In 2020 and into 2021, the preference for less dense environments have attracted investors and developers to single-family rentals, including portfolios of individual homes and purpose-built SFR communities. SFR is a management and resource-intensive business and does not necessarily translate into markets with high residential prices and high land prices.

Proptech

More of a real estate adjacent sector than a real estate sector itself, proptech is seen by many as the biggest winner in the socially distanced world created by COVID-19. The digitization of certain real estate management and operations enables, for example, virtual closings, remote systems monitoring and smart building controls, and can generate substantial overhead and expense savings.

Conclusion

The speed at which the real estate industry will return to 2019 levels depends on more than the vaccine rollout. Economists predict that pandemic-era trends such as the deep penetration of e-commerce into daily tasks such as grocery shopping, working from home and distance working, the emphasis on healthy working environments, and migration patterns are here to stay. The depth and duration of these trends will dictate the extent to which sectors such as industrial, single family residential and proptech will continue to be more attractive than office, multi-family and hospitality. However, activity can still be expected, even in distressed sectors due to the acceleration of lender enforcement activities and the need to deploy billions of capital allocated to real estate.

Non-pandemic factors are also expected to influence real estate this year, including the focus of environmental, social and corporate governance (ESG) on real estate, the Biden administration’s giving high priority to climate change, the inception of infrastructure projects nationwide and national and local tax increases.

Authors



Greenberg Traurig, LLP has a real estate practice that is a cornerstone of the firm and is a recognized leader in the industry. The firm’s real estate attorneys deliver diversified and comprehensive counsel for property acquisition and investment, development, management and leasing, financing, restructuring and disposition of all asset classes of real estate. The team draws upon the knowledge and experience of more than 400 real estate lawyers from around the world, serving clients from key markets in the United States, Europe, the Middle East, Latin America and Asia. The group’s clientele includes a broad range of property developers, lenders, investment managers, private equity funds, REITs and private owners. The firm’s real estate team advises clients on a variety of matters across a broad spectrum of commercial, recreational, and residential real estate, including structured equity and debt and the hybrids. The firm would like to thank Corey E Light, co-chair of the global real estate practice, for his contribution to this chapter.