We will be focusing for one hour on commercial real estate. Unlike the surprising residential real estate market, which soared in the 2020 pandemic year and momentum looking very strong in the early part of 2021, commercial real estate has been challenged. The rising vacancy rates in office and retail hotel, the rent collection becoming somewhat difficult.
So, today we have panelists to discuss the commercial real estate trends and what you can anticipate on the commercial real estate and which market will outperform likely based upon various factors, so thanks for joining. My name is Lawrence Yun, chief economist with the National Association of REALTORS®. For events like this, we always like to have a fact-checker or someone who can keep the economists in check, so we always invite a moderator from the media.
So we are very thankful to have Akiko Matsuda, who is a reporter with Real Deal. She has recently written articles related to some commercial brokerage revenue declines, the rent collection in office sector, so very good person to have in terms of moderating our session. And this session also will be recorded for later viewing for many several thousand people who have registered for the event. I would like also to thank the sponsor, who, we cannot put on this event without a sponsor, and want to thank the REALTORS® Property Resource, or as REALTORS® would know as RPR®, a free member service which shows the property type information for both residential and commercial. So if we can go to our sponsor video.
We heard you've been asking for a simplified RPR® experience. So, we've done just that. We've reorganized the layout on your home page, increased the white space, the font size, the imagery. So with every login, you can just focus on what's necessary. Residential and commercial properties are now searchable from one area because, well, let's face it—a REALTOR® should have quick access to any property at their fingertips. And to ensure faster productivity, well, we've created shortcuts to your most powerful tools. And now, you can keep an eye on your market areas right on your home page and view what you want the way you want it, and that's that's really what this is all about. You. Because when we're helping you live out your purpose of wowing clients and closing more deals, we're living out ours.
Again, thank you to our sponsor, RPR®, with their completely redesigned web page, so please visit, and certainly our members have value the information coming out of RPR®. So now, to our moderator, Akiko Matsuda, from The Real Deal.
Thank you, Lawrence. Thank you, NAR, for having me as a moderator for the event. My name is Akiko Matsuda, reporter with The Real Deal. My colleagues and I at The Real Deal work very hard to provide real estate professionals with facts and analysis because I think we believe it's very important have good information, particularly when the time is so difficult like now, and this summit shares the same goal, and I hope you take advantage of it. Let me introduce today's speakers.
Dr. Lawrence Yun is chief economist and senior vice president of research at the NAR. He oversees and is responsible for a wide range of research activity for the association, and regularly provides commentary on real estate market trends. Today he will address the broader economic outlook and how it will relate to commercial real estate including multifamily.
The second speaker is Dr. Calvin Schnure, Nareit senior vice president of research and economic analysis. He analyzes developments in the macroeconomy and their impact on REITs and CRE markets. And on financial returns to REITs, he will discuss how we distinguish the pandemic's permanent shocks versus transitory shocks.
The third speaker is Brandon Hardin, research economist with the NAR. He focuses on data reports and analysis on commercial real estate and develops market indicators from a variety of databases. He also creates forecasts for commercial real estate markets. Today he will talk about the outlook of two distinct sectors: retail and industrial.
Our final speaker is Gay Cororaton, senior economist and the director of housing and commercial research at the NAR. She manages the production of NAR's housing, commercial, and international statistics as well as surveys and research. Her presentation today will focus on the office markets. She also will talk about investment opportunities in top 10 metro markets. With that, let's hear from Lawrence.
Great. So the 2020 pandemic year, certainly a unique period. I think something that we will be sharing with our family members in the future about what happened in 2020, the housing sector certainly surprised us all with the strength, but the commercial real estate has been a challenge, particularly in certain sectors, of which later speakers will go over.
Let me focus on the broader economy and also focus on the multifamily sector. So this is the job market in the U.S. The big decline that you see in April 2020, this is from the lockdown that we had. Twenty million jobs gone in a single month. Never in American history have we seen such a drastic, precipitous drop so quickly. Then, due to the stimulus package, some jobs were created, but things were beginning to fizzle out towards the year-end. That was the reason why the second stimulus was signed into law by President Trump at the end of December. I think many of you already have $600 into your bank account, along with some small business loans and many other measures. President Biden believes that is insufficient, so he is ready to sign a bill that is likely to pass in House of Representatives, possibly today, which will top it additional $1,400 for most Americans, along with other unemployment extension benefits, because the economy appears to be fizzling out, and we need some support.
The second half of the year looks to be much better because the vaccination, widespread, is on time basis, so about half of America could possibly be vaccinated by the second half of the year, by mid-summer, and maybe another quarter by end of autumn. At that point, we have herd immunity, so hopefully we can get back to some normalcy in our life, may be able to see sports games in person, indoor dining, travel, but let's wait and hope for the best on the vaccination and in containing the coronavirus.
But as we look at the total job market across the U.S., what you see is a variation across the country. It's color-coded so you can essentially view that light blue is where job declines have been fairly minimal compared to one year before, while the darker blue and the green where job losses have been heavier. Part of this difference is due to the governor's policy. For example, Governor Cuomo in New York had a stricter lockdown for a longer period, and therefore the job market has been underperforming, while many southern states, as you can see, are doing relatively better. Only two states have more jobs today compared to one year before, Utah and Idaho. Those are the only two states with more jobs, but the other 48 states still trying to recover.
One unique aspect of the current recession, first time ever in America during a recession, where average Americans have more income during the recession compared to before the recession. The first column is GDP, and it's down, economy was down, but the right-hand column shows the personal income. We know of families standing in line at food banks, struggling with anxiety about the next housing payment. Nonetheless, on average, this is the first recession in America where average Americans have actually more income than before. Part of the stimulus package, the enhanced unemployment benefits, so quite amazing situation and a unique circumstance. What are people doing with this extra income? They're not spending it. First, there's not too many places to spend money, so people have been piling on savings. The bank deposits have been rising, which also means once we reach herd immunity, again, cross our fingers, maybe later portion of this year, that we may get back to normalcy, and all these savings could be unleashed back into the economy, and maybe all the retail sectors bounce back. Maybe we will begin to see people go back to offices. But the unleashing of these savings is a very positive potential for the economy in the second half of the year.
Now let's look at the rental multi-family market, apartment sector. So the initial lockdown, people got scared, many young adults simply moved back in with their parents or maybe they found another roommate. Considerable uncertainty at that period. So we saw the number of rental household decline, but note how it's coming back. So with each passing month, some job creation and maybe people are just simply tired of being cooped up with more people, so they are seeking out their own units. So the rental house household has been bouncing back as of the fourth quarter of last year, and you see a very similar pattern in vacancy rate.
Before the pandemic, apartment sector housing shortage, so housing shortage was not only about selling a home, but the vacancy rate had turned it lower. But with a pandemic vacancy rate increase, and of course there was a new supply coming on because, you know, people were still building apartments before the pandemic, and those completions, so even as the number of the rental households were rising, the supply was slightly greater, so it elevated the vacancy rate. But it will soon be turning down, assuming that normal historical relationship of jobs leading to more rental households. This is the total housing starts. So you see little jump in the latest month, but essentially no great movement, and principally these are all apartments. Ninety percent are apartments 10% condominiums, but essentially no, you know, any meaningful increase or meaningful decreases other than slight fluctuation during the lockdown months.
So what are some prospects of more rental households? I know some of the people in the audience sell homes, so you may also be interested in what's going to happen to home sale market. We are beginning to see potential turn in the housing market, home buying market. Mortgage applications, which had been running about 20% above one-year level, so consistently strong demand. This is mortgages to buy a home, not about refinance. But in recent weeks it is barely positive—only two or three percent positive, so rather than 20% positive, now the gains are much smaller. So is this a first early sign of some turn in the home buying market. Another sign is we've been monitoring our data pending contracts. Similarly, it's been rising roughly 20% above one year ago, the yellow line. But now we are beginning to see essentially no change from one year before. Now some of it could be due to the exceptionally large snow pattern that occurred, and it may have held back some buyers, but another reason is simply lack of inventory. The blue line shows number of new listings, fresh listings, and it is 16% below one year ago, so without listings, the pending contracts are simply not occurring. But encouraging news in terms of the people who are involved in rental properties, which is that the affordability is getting some ahead due to the fast rising home prices, and the fact that absolute low in mortgage rates are likely over, likely to be over, and given that some of the renters who may have considered buying a home may simply be choked out of the market given that affordability is weakening for home purchase.
I mentioned about the stimulus package. The second stimulus in December. Third stimulus that is likely to pass today, that is not free lunch. That is why interest rates are rising. Higher national debt, larger budget deficit, financed partly by printing of the money, is raising the blue line, 10-year treasury. So when the government has to borrow money, they have to pay slightly higher interest rate. What that means for real estate practitioner is that the red line, the mortgage rate, will be rising, so whether commercial developers who need to refinance their commercial loans, or for cap rates. So the rising interest rate environment means higher cap rates, so the property value may need to be slashed slightly due to the rising interest rate environment, and this clearly shows the divergence between commercial real estate prices versus residential. Residential in blue, prices rising, but now beginning to hurt affordability. But on the commercial sector in the aggregate, across all property types, it is down about 78% from one year ago.
So, to the forecast for the economy, the middle column is last year. Pandemic 2020. Negative GDP, negative jobs, absolutely low interest rate environment, no inflation. But in 2021, because of added stimulus and the possibility of herd immunity later in the year, GDP will be solid. Four percent growth, 3 million net new job creation, interest rate beginning to rise. Again, fiscal stimulus is not a free lunch. Higher borrowing costs and inflation beginning to edge a little higher for 2021 in terms of forecasts. So thank you for listening.
Now I'm going to turn it over to my good friend from the National Association of Real Estate Investment Trusts, Calvin Schnure, who will cover more details on commercial real estate and the REITs sector. So Calvin.
Okay. Hello everyone. Lawrence, thank you for inviting me to speak at the conference. Always good to see you, limited vision that I have of you, but it's good to be here. So Nareit represents the REITs, Real Estate Investment Trust and owns a large slice of overall commercial real estate in the U.S. Just before I get into my slides, let me give a really quick overview. Yes, the commercial real estate markets have had more of a hit than the residential markets. We're actually getting some signs, some good news that the sector's already beginning to recover.
Earlier this morning we released data for the fourth quarter from the Nareit T-Track, which is a summary of earnings reports from all listed REITs, and it actually showed that earnings have reached, retraced about half of the decline that happened during the shutdowns last spring, so we are seeing signs that there's a recovery. Now this recovery is incomplete, a pretty similar pattern to what Lawrence was just showing, with the macroeconomy, where the macroeconomy has not opened up completely.
It's not surprising that the commercial real estate markets have not recovered completely, and it's going to take some time for some parts of their market to recover. The third point is the impact of the pandemic has been very uneven across the property sectors. I don't need to dwell on this. We know that if you're looking at hotels, things related to travel, shopping malls, and things like that, obviously they had, were hit very hard. You look at some of the others, like apartments and offices, that's a sort of middle impact.
REITs also own real estate to support the digital economy. They own data centers that hold, host to cloud computing. They own cell towers that are transmitting voice and data communications. Those sectors have done very, very well. So it's been a very uneven impact on the real estate part of the economy.
In terms of the long term outlook, the medium- to longer-term, I do expect it in the second half of the year as the vaccines that people get more back to normal in activity we're going to see a much more complete recovery in commercial real estate markets, but there's some longer-term questions, especially what's going on in retail with the competition between bricks and mortar retail and e-commerce obviously that the ground shifted there during the pandemic, and also in the office market, if work from home is going to be a longer term phenomenon. Now I'm looking down because there, my app is working, and I can switch slides.
These are some bullets on the background. Now, it's worth thinking a little bit about the background of how did we get here, because these points probably matter more for the outlook than current conditions. I'll stress this. The way that we got into this current crisis matters more for the outlook than where we are right now. Why is that? Traditionally, in an economic downturn, in a downtown in commercial real estate, you have internal weaknesses. Like you have over building in commercial real estate. We've seen that again and again. You have overheating in terms of prices getting beyond fundamentals. You have over-leveraging, over-indebtedness. These internal weaknesses, if they lead to a collapse in real estate markets, it can take, you know, months or even years to to recover. Now, that did not happen. This was an external shock. It actually hit an economy, where supply and demand were reasonably well-balanced in most property markets, pricing was showing few signs of speculative excess, and debt levels were not as excessive as they had been in the past. So, in short, big risks that we've seen in past downturns that took a year or several years to work off really were not present when this crisis hit this final point. I already mentioned that there's a differential impact across the property types, so let me continue moving forward.
This table shows the REIT stock returns through, for three periods last year. Now REITs are a pretty good indication for overall real estate because overall commercial real estate about 80% of commercial real estate, investment grade commercial real estate, is held in private hands. We don't see a whole lot of information. They don't publish their earnings. They don't publish all of the operating performance for everyone to see, but REITs can provide a pretty good window, and the restock prices can tell you a lot. I put these into three broad groups.
You can see towards the top are the hardest-hit sectors, and it's some shade of red that I had on my computer, that's the retail, and the lodging and resorts. The middle part are the data centers, the cell towers— infrastructure means cell towers here—and the industrial that a logistic facility is delivering goods bought on the internet. Those are the ones that did well, and then all the rest are in the purple. The columns reading across, I'm not going to look at every number here, but it shows you the first set of columns there was a sharp decline when the crisis hit in February and March. That's the first column where all of these were down, you know, 30% to 50%. The middle column is showing stabilization as people realize, well, with some of the adaptations we make from work from home, with e-commerce deliveries and other changes, the economy was going to get through this on a rocky basis, but getting through it. Then the final column shows the post-vaccine rebound that was pretty strong across all property types. Now, one thing that is, I am going to call attention to one number here. If you look at the top line of the blue or purple, the all other sectors, that's the office sector, which has had a bit of a decline in office vacancy rates, or rising vacancy rates and a decline in earnings, but not as dramatic as you had in retail and lodging. But if you look at the year-over-year change was down 23% in the stock return, which is about twice what you had even in a lot of the retail or the lodging resource. Why is that? That's a puzzle that I'm going to come to at the end when we're talking about potential longer-term impact.
Now where do we stand right now? This is looking at the price index and, Lawrence, these are some different numbers from what you showed. I'm looking at data from CoStar that has a lot of very detailed data on transactions. They construct repeat transactions index and this actually says the valuations have held in pretty well. The overall index value weighted is the dark blue, and it had a rise over the past year mostly because the apartment market has continued to do very well. The multi-family or apartment market is the light blue, and it's risen by almost a double-digit amount over the past year. The value weighted index, so it's weighted by the value of the property, not the number of the properties. Excluding multi-family is the gray bar, so that's going to be the office, the retail, and the industrial markets, and that's roughly been flat over the past year or so.
But the real point is, compare these to 2008, 2009. 2008, 2009, they all fell 20% or more, and it took several years to get back to where they had been. This is the reason why I stressed, "What were the conditions prior to coming in?" We did not have excessive speculative prices or excessive leverage or excessive overbuilding when we entered this crisis, and that's been really good for evaluations and it's going to be good for keeping the valuations going forward. The right-hand side, we can see the sales volumes. A similar picture. Transactions ground almost to a halt when people were first shut in, but they've come back pretty quickly. They've come back pretty quickly because a lot of the market has better fundamentals than it did during 2009, and people were able to get some deals done by the internet with pricing. Cap rates are quite low. The left-hand side shows the cap rates across all the different markets. They're quite low, which would cause possibly some concern. Is this a frothy market? Are the prices vulnerable? But you, you'll, we're a low yield, low interest rate environment. The dark black line is the 10-year Treasury note.
Really what matters for the investors is the return. They get in excess of the Treasury yield, and those spreads are shown on the right. They're quite wide. They're quite wide. They're comfortably wide. Lawrence was discussing his forecast that interest rates are going to be trending up over the next year or so, and with spreads in this range, it's probably not going to be a big threat seeing some increase in interest rates.
I mentioned earlier the Nareit T-Tracker funds from operations, this funds for operations, the standard non-gap earnings measure for REITs, and it's recovered. Look at the final couple of quarters there. It's risen, replacing about half of the decline that happened during the lockdown.
Now a lot of the weakness was in the retail and the lodging, the hotels, and they're still very weak. But you look across the other sectors and we're seeing signs that earnings are coming back, and that's going to continue as we see the economy opening in the second half of the year as the vaccines are more in place.
The REIT sector has been relatively resilient. The REITs of, even the ones that have had a big decline in earnings have been fairly stable through the crisis, and a lot of that is because their balance sheets are much stronger than they were before. Again, we don't have the same type of information in the privately-held real estate, but there are similar decreases in leverage.
Left-hand slide is showing the book leverage. The dark blue is showing the debt-to-book assets, and leverage ratios were about 10 percentage points lower when this crisis hit than they had been in 2007-2008. That means that they're not as likely to get into difficulty. I look at the right, they have lengthened the maturity of their debt. The average maturity had been five years or so in 2009, and it's seven years or so. Now they don't have to roll over the debt in the middle of the crisis. We also look at the interest coverage ratios, saying, "What is their interest? What is what is their cash flow? What are their earnings, or what is their earnings as a multiple of their annual interest payments?" and I've got two different histograms because looking at a weighted average doesn't really tell you as any one company to get into trouble. This is looking at the distribution, and really we want to see how many of these companies, how many of the REITs have interest coverage ratios below three times, a multiple of three times, because that's when you get into situations where you don't have much financial cushion, and in 2007 about 60% of the REITs had interest coverage ratios, interest coverage multiples three times or lower, but right now that's down to 20%. You can see the light gray bars have shifted quite a bit to the right.
The real estate industry, I mentioned at the very beginning, of less leverage, this shows up in this financial stability of the sector. Getting to the longer-term, I mentioned that the office market, the office REITs, their stocks were down 23%, more than just about any other sector even though their vacancy rates were not that, not that weak, third, their earnings were not that weak.
What's going on a lot of people are concerned about potential longer-term impacts of work from home, and is that going to reduce the demand for office space. Now, I have a couple slides here. I'm going to have to explain this a little bit. I looked at CoStar data on the top 50 metro areas in the U.S., and I grouped by the gateway cities. San Francisco, Los Angeles, New York, Boston, Chicago, and Washington, DC, and then the rest of the cities, this can, you know, you can come up with a list of all those next-tier cities. Seattle, Atlanta, Dallas, Houston, and so on, and looked at the change in demand from the first quarter of last year through the fourth quarter, the net absorption as a percent of the stock, and the gateway office markets, I had a pretty big decline in demand, especially in San Francisco, but also most of the other major cities had a big drop in office demand that's consistent with people working from home.
Secondary office, the secondary cities had a smaller decline in demand. It was on that down for most of them, the dark blue bar is showing the range from the top to the bottom, and then the big blue bullet in the middle square is showing the weighted average. Less of an impact on the secondary cities. But now look at the apartment market, look at the multi-family market. You had only a slightly negative impact on demand in the biggest cities, but you actually had strong positive demand in the secondary cities. But this is suggesting, is we've seen a lot of stories that work from home is allowing some people who might have wanted to be close to a downtown area to move out to the suburbs, to be a bit farther out. This is actually saying people may have moved from San Francisco to Sacramento. They may have gone from Washington, DC to Richmond, Virginia. They may have gone from Boston out to Concord or someplace that's beyond normal commuting distance, and this is very different from just saying that you move out into the suburbs. We see a similar pattern with vacancy rates. Again, same thing, gateway office, secondary metro office, gateway multi-family, secondary metro multi-family, and gateway office had a pretty big increase in vacancy rates, especially in San Francisco. Secondary office, also an increase, but not quite as big, whereas in the big cities the vacancy rates in the apartment market rose quite a bit, but they were on net about flat in secondary cities and in an awful lot of secondary cities, the vacancy rates fell.
This is really suggesting that people got up and moved out of one of the big cities into something that's smaller. Final point here— sorry, I've looked on this little app that we have for moving these slides—we see it particularly in the rent growth. Rent was quite weak in the big city office market, the first bar. It was, you know, plus and minus in the secondary city office markets. Again, saying the work from home is having much bigger impact on the more expensive gateway large metro areas, but then you look at the rent growth in the apartment market, negative for the big cities, and San Francisco is the one with a really large negative, but you look at the secondary cities, on balance is positive. On balance is positive, and some of them were quite robustly positive, so this is suggesting that work from home is having a real impact on where people are choosing to live if they don't have to commute. It could affect the office market long term. It could affect the apartment market long term. I don't know if this is permanent. We are seeing some suggestions that some people are moving back. This may have been something that people do for a sublet for six months, a year, two years, not really sure. We have someone else who's been talking more about the office market later on, so I'll leave that there. Markets to watch. I have lines that are going to find out which ones are going to perform really well. I wish I could tell you which ones are going to perform really well. I wish I could tell you about any investments there.
What are we looking at, though, in the apartment market, in multi-family? The pandemic shock to demand is likely to be transitory. There's a longer-term issue of lack of supply and strong demographics that are going to take over in the year ahead. I think year head, you're going to see multi-family apartment markets firming pretty much across the board.
Office market, I just finished talking about that. Work from home, it's likely to boost flexibility. Most of the surveys say that most employers expect people to be back in the office most days of the week, but it'll probably be somewhat flexible how they work.
Retail, we're gonna be talking about a bit later. E-commerce has obviously had an impact, but bricks and mortar is actually in markets that have good job growth prior to the crisis. The bricks and mortar retail probably does have a reasonably good future.
Industrial, these are the ones shipping the goods about in the internet, quite strong demand.
Senior housing. We've seen a lot of senior housing that has, senior housing, skilled nursing, obviously a lot of temporary impacts from the pandemic, but we are going to be facing demographic thanks to the baby boom generation coming along. I'm just going to take one minute to talk about this.
The sectors in REITs returned, the digital economy, the data center cell towers and so on, they're actually facing strong demand and will continue to face strong demand in the future.
So, I'm about out of time. We have some Q&A afterwards, but again, just to summarize, we are seeing signs that overall commercial real estate markets are beginning to recover, but it's uneven and we don't really expect a full recovery until the pandemic is brought under control. And next, we're gonna have Brandon Hardin. He's going to be talking about the retail and industrial markets, so thank you for letting me present this information.
Thank you, Calvin. So, prepare my slide.
The pandemic created winners and losers within retail despite stimulus, which helped spending and hiring. Retail employment has yet to recover from the pandemic, but show gains as pandemic-related restrictions eased in some areas of the country. We still need an additional 362,000 to 600,000 jobs to reach the prior peak, and recent data indicates February 21 versus February 2020, substantial losses in clothing and clothing accessory stores.
Discretionary retail, like apparel and department stores, have had a difficult time recovering, which in result, increase bankruptcies and store closures, but recent retail trade sales indicate increases on a month-to-month basis. So 2020, and this actually turned out to be a pretty good year with respect to retail trade sales. As of late, we're exceeding April 2020 sales by 155.4 billion dollars in the prior peak by almost 40 billion.
The pandemic highlighted the significance in having an online presence as e-commerce, which was already increasing, which was already an increasing trend, saw robust growth. The transition to e-commerce during the pandemic was especially evident in the second and fourth quarters, with record U.S. holiday sales. E-commerce sales in 2020 accounted for 14% of total sales, which was up from 11% in 2019. E-commerce sales totaled across the year 791.7 billion dollars, which represents an increase of 32.4% from 2019. All this e-commerce sales growth underpins the increased demand we see for warehouse space.
Retail net absorption, completions, rent growth continue to decrease as increases of bankruptcies and store closures result in a rise in vacated space. Negative 26 million square feet of U.S. retail space was returned to the market throughout 2020, with negative 2.7 million square feet of U.S. shopping center coming back onto the market in the fourth quarter, but Ohio cities led positive net absorption. Negative net absorption of shopping center space was led by Boise, Idaho.
Although centers make up 50% of retail transactions in both the gateway cities and non-gateway across the long term, investment activity is increasing for shops more so than shopping centers as centers' challenges continue.
Retail store closures increased as, you know, bankruptcies from apparel retailers, department stores, and other retailers rose at shopping centers. Smaller tenants continue to struggle. Many do not have the financial resources to sustain decreases in revenue and are essentially forced to close, and with that retail vacancy increased to 7.2% in the fourth quarter and without stimulus in 2020, the vacancy rates would have been even higher.
Shares of sales of retail property significantly decreased as a result of the pandemic, with investment activity decreasing 43% year-over-year in 2020. Stay-at-home orders and the travel bans were some of the obstacles hindering the acquisitions of properties. Retail prices decreased as well with the retail sector recording the sharpest decline among all the sectors as retail sales transactions of 2.5 million or more continue their downward trend.
And the outlook. Retail traffic growth essentially depends on how safe consumers feel they are going into stores. The easing of pandemic-related restrictions and vaccinations, the rate of vaccinations is critical to the course of retail as more vaccines become available and a larger portion of the U.S. becomes vaccinated, retail growth is anticipated.
Downtown retail and food. Improvements should be seen and it's anticipated in the second half of the year as vaccines become more widely distributed, and once they do, the potential return to the office. If that takes place, this will be reinvigorating for the retail sector. Retailers will continue to adopt new technology to handle the larger share of online sales and online retailers should continue to capture new and retain current consumers. As consumers continue to utilize their new digital behaviors, e-commerce penetration will increase, but not at the same pace as in 2020.
We anticipate continued retail fallout, though, and those retail, in the new retail environment that remains, will consist of retailers who have solid finance financial foundations and those who adopted to consumer digital behaviors. As tactical store closures and bankruptcies increase, adaptive reuse and conversions will create opportunities for investors and developers.
Now the bright spot of commercial real estate. Its durability was displayed throughout the pandemic and investors made this their preferred asset type.
Industrial. To support the robust growth of e-commerce as consumers change their digital shopping behaviors, we're seeing increased jobs in warehousing and storage by more than 72,400 jobs from the peak in February of 2020. U.S. industrial net absorption in the fourth quarter totaled about 90 million square feet. Across 2020, new leasing was about 660 million square feet. The U.S. industrial vacancy rate increased slightly from the first quarter—4.9% to 5.2% in the fourth quarter, but, you know, new supply totaled 350 million square feet across the year, which represents a 5.7% year-over-year increase as supply continues to outpace overall demand and it has done so since 2019. The northeast recorded a 68.5% year-over-year increase, and net absorption for industrial space was led by the south.
Occupancy gains. For 80% of the markets recover we see positive net absorption was led by Atlanta, Georgia. Negative net absorption led by Seattle, Washington. U.S. industrial asking rents were solid across 2020. They increased every quarter. The top five markets year-over-year percent change in industrial rents we identify as Buffalo, New York at first in the northeast, with 8.8%, leading the other regions.
Deal activity by the close of 2020 was as strong as ever in spite of the recession. Industrial property transactions reached record levels. Warehouses are showing the most significant growth though, at, in setting a record pace as industrial sales transactions for 2.5 million more continue to remain strong.
So, the outlook for industrial. Strong demand will continue, new absorption will continue to surpass 200 million square feet, asking rents should continue to increase with respect to European growth. Supply is anticipated to continue to outpace demand moving forward, but new supply will push up overall vacancy as more supply will be produced then absorbed.
And with that, I would like to thank you, and next I'd like to introduce my colleague, Gay Cororaton, who will discuss the top 10 commercial real estate markets to invest in. Thank you.
Thank you, Brandon. So I'd like to be mindful of our time. We have 10 minutes left, and this will be the last presentation before we do our Q&A with Akiko.
So a lot of the topics and the materials have already been covered by our previous speakers, so let me just go through with the ones that I think need to be emphasized.
So, the office market is recovering and you can see that in the recovery of jobs. 1.7 million jobs created, but we still have a lot to go, but certainly with the vaccine distribution underway, we should see jobs recovery picking up. The other game-changer is working from home. So, four times more workers working from home compared to 2019, 6% in 2019, we're up 23%, but the important thing to note here is that in your office-using sectors, for example, jobs like computer, mathematical, legal, business, financial, half of those workers are still working from home. So are the future of office use space and what will become of working from home will depend on this office, what we call this office-using industries, and obviously with the decline in employment and with more people working from home, we've seen occupancy falling and we've seen a rise in, of vacancy rates.
The office occupancy decline of about 98 million square feet is about the same level that we had during the great financial recession or the great recession of 2009 and also during the tech bubble, but vacancy rates are much lower now because of less overbuilding in the past years before the pandemic hit.
Now, the important thing to note is that half of the, for example, in San Francisco, half of that vacancy rate is coming from the available space through subleases, so this pandemic is a bit similar to the 2000 period when there was a tech crash bubble. You have a lot of tech jobs that just went bust, so releasing a lot of office space, so it's similar. Now is similar to that but not quite, but again, the use of this sub, the use of this vacant space that is available through self listing think of your WeWork, will influence what will happen to rents moving forward, because if you can't rent that sublease space, then the direct lessors will also, or the direct tenants will also have to reduce their demand moving forward.
Biggest decline, not surprisingly, San Francisco, New York, these are your big offices, and but you see the little, the smaller metro areas rally. Durham, Boise, Northern Virginia, Fort Myers, those have increased office occupancy and it's because most of the office jobs are in those key metro areas.
What about rents? San Francisco, New York, again, the gateway cities, you see the blue areas there on the east coast. And in the west coast, San Francisco, those are the ones where rents have been falling, but in most of the 52 markets that we track, rents of, office rent space may have weakened but they're not declining, and why is that?
Well, as Calvin had mentioned, businesses know that the pandemic is a short-term thing. You know, it's not going, it's not a permanent, it's not a permanent shock. It's a short-term shock, so they're not dropping their asking rents. But what they are doing is, and this is according to our survey of REALTORS®, they are providing more rent concessions So, so that is lowering the asking, that is lowering the effective rate, but that is what they're doing. Asking rents remaining the same but giving more concessions to attract tenants and also offering more short-term office leases.
Prices. Prices, and now I'm looking at Real Capital Analytics data, there's so many price indicators out there. CoStar, Green Street, uh, essentially softening prices, but the important thing to note here is that prices are not collapsing like they did during the great recession, and why is that? You don't also have a lot of distressed sales happening now. Uh, great recession you had 20% being sold as a distressed sale, now less than one percent and, again, what is the reason for that? Well, Calvin has mentioned they're not over-leveraged. Mortgage rates or financing rates are low. Banks have not tightened up or squeezed on the credit, and of course there's the support from the federal government and the Federal Reserve Board through your paycheck protection plans and your main street lending, so financial support has not shut down, and so firms that are, need financial help are able to get that and so they're not selling their assets and prices are not crashing.
A key issue is, uh, is the office moving towards suburban or CBD? The data is showing that right now the sales transactions are happening in your suburban markets, a rising share which you can see on the left and also on the right side you can see that suburban prices are already picking up, but prices in your CBD markets are falling. Now, again, this is temporary, more due to the fact that, you know, people are still working from home, but once they return, and offices are still shut down, people are not yet traveling through transit, but once the vaccine is completed, vaccine distribution is completed, by the second half of the year, and completely by 2022, so we'll see workers returning and so we'll see more transactions also happening in your central business district markets.
And just to place in context where the office is relative to the other property assets, so hotel and retail are down, office is, you know, middle of the pack, but your big players or your property assets where prices are still rising and demand is strong is apartment, multi-family, and your land market. Very strong in the land market.
Okay. So what's the outlook? So Lawrence had already mentioned that we expect GDP growth to, we expect growth to fall, uh, to be around 4% this year. So positive growth, essentially, and with that, we'll see a recovery of office-using jobs. So we expect that office-using jobs will return by the first quarter of 2022, which means that demand for offices will also start picking up. The question, of course, is what percent of the workforce will be working from home?
So the critical thing to watch are those industries that use, are intensive in the use of office space, and right now 9% of the workers there are working from home. If 25% of them will work from home, and based on studies, for example, like McKinsey and other studies, that say that, you know, employees want to, you know, work hybrid or some of them want to work from home and also the impact on productivity. If 25% of those office-using workers from, work from home fully, and, say, the percent of the workforce that works from home will rise from 6% in 2019 to 10%, we will see an increase in vacancy. Now, the 10% rate is consistent with the forecast of a panel of experts we had last December at our real estate forecast summit, where they, you know, where they think that the number of, the share of the workforce working from home will fall around 12%. So if we consider this
working from home, even if jobs do return, I think the outlook is, we will continue to see an uptrend in your office vacancy rates. We won't see any decline could be higher if a higher fraction of the workforce will work from home. That is still evolving. We will have to watch for that, but certainly much higher than the vacancy rates for industrial and multifamily, which have been the brightest sectors and also even retail, there was an upsurge in the second quarter, but a vacancy rate in the retail has gone down. But of course, our retail space has also already been released for other uses, and retail space is being also converted into other types of uses, as Brandon had mentioned. So we're not seeing strong vacancy rates there.
With that, let me finish off with the top markets which have the strongest commercial market conditions, and here, you know, we're really just looking at, broadly at what is the overall economic growth in that sector, taking a look at GDP growth, employment, household income.
Demographics. Demographics always drives long-term changes. Are people moving into the area? Is population growing? Housing. How tight is the rental vacancy rate? What are the apartment rents?
And commercial indicators. Is there an increase in demand measured by absorption? Is asking rate low? So how do asking rates compare to other metro areas? And based on those factors, here it is: most of the, or the top 10, metro areas that we think will offer the best opportunities for commercial development and investment based on the conditions, based on the indicators we're seeing now, are in the south, Raleigh, Charleston, Cape Coral, Nashville, Austin. In the west we have Salt Lake, Tucson, Phoenix, and Las Vegas, and a few of the indicators that are very telling is, one, your rental vacancy rate and your apartment rent to wages. You can see on the third column there that most of these areas, except for Charleston, the rental vacancy rate is below the national average of six and a half percent. Now, six and a half percent is considered tight. Normally we've had eight to nine percent rental vacancy rates, but even in Charleston, where you had a 28.8% rental vacancy rate, look at your apartment rental wages. A single worker will have to spend 34% of their wage on rent, so in most of these, the ratio is above 30%, and so these apartments are not just affordable because there's a lack of supply, so certainly in these areas and in many other markets, multi-family investment is really where you need development to take place.
Office vacancy rates. The ones we are seeing which have the greatest potential there is Cape Coral, Fort Myers, and also Tucson. Why office vacancy rates are low? Cape Coral 27 dollars compared to Miami, that's 35 dollars. Tucson you're looking at twenty dollars compared with San Francisco, San Diego, fifty dollars per square foot per office. Fifty dollars per square foot. Industrial vacancy. Brandon had already mentioned there's a bit of oversupply in the last two, last two years. Oversupply there, but some areas like Cape Coral, Fort Myers, and Nashville, very low industrial vacancy rate, and also Austin.
So, again, it's rent, and then finally, for retail trade, you can see that Nashville, Phoenix, Las Vegas, those are now showing increase in retail trade employment and that's really driven by the fact that those economies are now opening and so we expect to see retail trade employment and areas where populations is moving in, such as, for example, Phoenix, the area with the largest migration among these sectors. We'll still expect to see an increase or more development activity in your brick and mortars there. Nobody is going to shop, I think, fully online. Before the pandemic, we've had this movement towards what we call experiential shopping, you know, you go to a store, you experience it, you do something else, you do yoga, exercise ,there and then maybe go back to your computer and buy the item there, this omni channeling. So retail bricks and mortars won't exactly go away. Of course, there will be some challenges, but with that, thank you so much, and we will go now to the Q&A session with Akiko. Thank you.
Thank you, Gay, and thank you, all the speakers. This presentation really make it clear that the pandemic affected each sector in real estate very differently as well as depending on the region, the impact is really different.
But I have a question for Lawrence that is going to have a broader impact. You already touched on it, but how does this stimulus package is going to affect commercial real estate? Also, there was a question from the audience— What's the Fed's inflation target? Can you talk about that?
So on the stimulus measure, certainly it's going to revive the retail sector, where people feel much more comfortable going to the shopping mall. Some of the hard hit market is the expensive markets of San Francisco and New York, and again because of the COVID situation, but now with the increased vaccination, and it seems like it's moving along very nicely, and maybe, you know, people want to have that experiential, where it's not only about trying to find a product, but people want to move around people, want to move, you know, walk the sidewalks, do the window shopping. So, it, so, the stimulus bill will certainly help that.
On the question on the inflation target, it used to be that Fed was monitoring two percent inflation target. Now, I think inflation will surpass that by year-end on a year-over-year basis, but Fed has changed their policy stance. Rather than putting two percent inflation target as the maximum, now they're saying they want that two percent to be average. In other words, they may tolerate three percent inflation, given that we had very low inflation before, during the pandemic and even before that time period. So they want the two percent inflation rather than to get a target but to be the average, which means looser monetary policy or longer period.
Thank you, Lawrence, and this question is for Calvin. You talked about REITs, retail, and lodging suffered at the onset of that pandemic, but I realized that retail was still suffering, is still suffering, but lodging recovered much better in terms of the stock recovery. Why do you think this is happening?
Compared to retail REITs lodging REITs have recovered. This, the stock prices of the hotels, the lodging, resorts, came back a lot faster than the retail because investors had a pretty clear sense that the impact of the pandemic on lodging was transitory, and as it's safer to move about and safer to travel, we're already seeing bookings go up. I'm hearing all my friends talk about how they're looking forward to traveling. The hotels are going to be full by, if not later this year, certainly early next year. That gives you an idea that their valuation should be back.
Retail, there's a bit more of a question about the longer-term impact of e-commerce. Now, I've done some separate analysis that suggests that the pandemic really just accelerated the shift towards e-commerce by about a year or two. It pulled forward changes that we would have seen over the next two years or so into something that happened in 12 months. A lot of REITs, the malls in the high-income areas, were doing well with their experiential, their food courts, their exercise clubs, and so on, and a lot of the retail will still do well, but there are just lingering questions about the sector overall.
Thank you. And Brandon, you talked about industrial warehouses. You know, we've been writing so many articles about new warehouses being built in a planned board. Are we building too many warehouses? When do you think, really, oversaturation is going to happen?
I think we're okay right now, although a prospective construction may give the perception of oversupply, the share between a prospective and build-to-suite space indicates a a different idea.
Nearly 60% of prospective construction paid space was under construction in the fourth quarter last year, for which the remainder, 40%, excuse me, 60% before. The remainder, 40% build-to-suite space. So a much more conservative speculative share that what we saw in other quarters, so a little over 40% of industrial space under construction is pre-leased, so the rest of the available prospective construction has enough supply to provide occupiers with enough options ,for growth but not enough for, or to significantly alter the vacancy rate or sidetrack rent growth.
Thank you. Good point. I appreciate that. And Gay, this is from the audience. So you and Brandon talked about retail conversion to something else. Have you heard office conversion to something else already, or not really happening yet?
We have, I have not heard of that issue yet, that offices are being converted to something else.
Perhaps, I think the trend that is happening more is that your traditional offices that are offering traditional leases are now trying to offer more flexible leases, shorter term, and then just offering more, like hot desks, so I think it'll, the shift is coming through more of the tenure and the square footage rather than a conversion per se of an office into another type of property asset.
I see. So when I'm talking to those landlords, brokers, they often say, you know, there's going to be flight to quality. What do you think about that? You know, Class A offices are going to do better than B, C, do you agree with that?
So, right now we do see that vacancy rates ticked up in your Class A, but that is just really more because of your working from home. I do think that, yes, it's possible we'd have a flight to quality, and mainly because again it's this working from home, right? We want these plexiglasses, we want touchless elevators, we want a lot of office, you know, lots of office space, and I think your Class A offices which are funded by, you know, your big investors have that financial capability to implement all this, all this equipment and all the infrastructure needed to put in place to to ensure that the workers come home, come to work to a healthier and safer environment.
I haven't looked at the financial capability yet of Class B, Class C, but those could be your small investors, too. So if there's funding for that, yeah, they can also easily put up this, put up these installations that will make a return of the workers to a safer, healthier place, but for now, it's, it is a, it is a flight to quality just because that is that is what usually happens when you have an uncertain economic environment.
Thank you so much for answering all the questions, and thank you so much for having me as a moderator. It was such a pleasure. Lawrence, should we wrap it up?
Yes. So we are slightly over on that time, so thank you for your patience, the audience out there, and it is recorded for distribution, so, again, thank you everyone for joining, and I want to thank the panelists for also providing great insight and a great job. Thank you. Thank you. Thank you. Thank you, everyone. Have a wonderful day.