Real estate and construction industry outlook


Authored by RSM US LLP

From suburban migration to the impact of e-commerce on retail, the real estate market is rife with change and opportunity for savvy participants set to pivot and meet evolving needs. Meanwhile, construction is set to benefit from a boom in housing, the renovation of industrial space and impending infrastructure spending under a new administration.


  • Hospitality is pivoting with new footprints, shifts in service and stepped-up safety protocols
  • Senior living, hard hit by the pandemic, eyes a turnaround amid vaccine distribution
  • Pandemic acceleration of e-commerce is resulting in significant shifts to retail space
  • Traditional office space, although pressured, is poised for survival
  • Single-family housing remains hot amid low interest rates, changing consumer preferences
  • Construction likely to see boost in projects amid infrastructure buildout


Real estate: Recovery, imagination and resilience

The groundwork has been laid for a sector-wide recovery in 2021 across real estate, which was heavily affected by the global pandemic. Investors are on a hunt for yield against a backdrop of lower interest rates and stagnating gross domestic product growth, among other factors creating demand.

Hospitality gets a shot in the arm

Those still questioning future demand for travel in a post-COVID-19 world need look no further than home rental company Airbnb’s debut in the public markets. With the stock trading nearly double its offering price in early December, enthusiasm hasn’t waned and demonstrates that companies that are able to nimbly adapt to shifting consumer preferences can win in an increasingly complex operating environment. Hospitality-focused investors have also pivoted their strategies: tailoring offerings, restructuring operations and investing in technology in an effort to make it through to 2022 when the pandemic is expected to be largely in the rearview mirror.

According to a joint report by STR and Tourism Economics, the hospitality industry forecast for 2021 remains bleak and full recovery in revenue per available room, or RevPAR, is unlikely until 2024.

Although the new year brings new resolutions for consumers, with travel at the top of many to do lists, the properties positioned well in 2020 will continue to be the beneficiaries through the majority of 2021 as pent-up demand for travel is unleashed. “Even with the encouraging vaccine news, this pandemic and the subsequent economic impact will continue to limit hotel demand generators into the second half of next year,” said Amanda Hite, president of STR, in the report. “Business demand won’t return at a substantial level until caseloads are better contained, and in the meantime, recovery is going to be primarily driven by lower-tier hotels in the leisure-driven markets with outdoor offerings.” Along with the promise of the vaccine is the reality of more detours ahead: vaccine rollout has been slower than expected, and estimates through December indicate that only 4 million, or 20%, of an expected 20 million U.S. citizens were vaccinated through Dec. 31, 2020.

The continued dependence of airlines on leisure travel is a strong signal of muted go-forward business travel demand, and it raises the question of whether the category will ever return to pre-pandemic levels. December brought weaker-than-expected demand for all types of travel, resulting in a reduction of domestic routes and projected first-quarter cuts of 40% year over year. Meanwhile, the pandemic has forced long-time business travelers to settle for virtual meetings, and recent trends in airline ticket transactions and fares point to a recovery anchored by younger, cost-driven leisure travelers.

Survival strategies

Most financial strategists would agree there are only two ways to improve a company’s bottom line—cut costs or drive up revenues. The focus by many properties on staff reductions and alternative service measures, coupled with nominal investments in technology, are prudent first steps in stopping operational free fall. Hotel operators are also making smart moves to support new cleanliness protocols, touchless technology for check-in, and mobile phone use for key entry and front-desk requests; these are cost-effective changes that may provide permanent cost savings when the pandemic ends.

Food and beverage sales are another major revenue source for hotels, and at many properties, food service is now a shell of its former self. Restaurant dining has been largely replaced by intimate dinners in guest rooms, with butler pantries providing safe hand-off for room service orders. In an effort to control costs and food waste, many properties are limiting service hours to dinner time and tightening menus to a few popular items. While some guests will be dismayed by the lack of room service breakfast options that have been a mainstay in the hotel arena, operators are now required to pick their battles for the best interest of the properties as a whole.


With average occupancy looming around 40% in the United States, vacant properties cannot break even without support to the top line. The enactment of an extension to the unemployment provision of the CARES Act under H.R. 133 is a start, with several enhancements set to directly benefit the hospitality sector. But in the absence of desperately needed continued fiscal stimulus for the hotel industry, operators need to drive up sales using technology and data analytics for more targeted marketing. At the end of the day, hospitality’s prescription for a full recovery includes increased traveler confidence, aided by the deployment and distribution of a vaccine globally, which is easier said than done.


Hospitality-focused investors are pivoting their strategies by tailoring offerings, restructuring operations and investing in technology in an effort to make it through to 2022 when the pandemic is expected to be largely in the rearview mirror.

Senior living

A coronavirus vaccine on the verge of broad distribution cannot come soon enough for U.S. operators of facilities that house the nation’s elderly.

Senior housing of all kinds—including independent and assisted living facilities, as well as those offering skilled nursing—have been hit hard by the pandemic, both in human and economic terms. With a particularly vulnerable population, senior facilities have had higher rates of mortality during the crisis; more than 106,000, or 38%, of the U.S. deaths attributed to the coronavirus were linked to nursing homes as of Dec. 4, according to The New York Times.

To protect their workers and residents, operators paid more for medical staff and equipment. On top of this, most properties stopped taking in new tenants, causing occupancy rates to plunge. Occupancy at independent living and assisted living facilities has dropped below 90% and 80%, respectively, and skilled nursing facility occupancy has fallen by more than 10 percentage points this year.


But there is a light at the end of the tunnel. Both health care workers and the elderly have been identified as groups that will be early recipients of the vaccine. “We believe that a safe and effective vaccine will provide important fuel for our recovery. And again we are grateful that senior living is being prioritized,” said Cindy Baier, CEO of Brookdale Senior Living on the company’s third-quarter 2020 earnings call. Many property operators have already been proactive in connecting with state governments and local pharmacies to get their spot in line when the vaccine does start to be distributed. This will lead to unlocking demand that has been pent up over the past year as the sector looks ripe for gains in 2021.

We believe that a safe and effective vaccine will provide important fuel for our recovery. And again we are grateful that senior living is being prioritized.” Cindy Baier, CEO, Brookdale Senior Living


Real estate reimagined: A focus on transforming preferences

Retail’s new normal

Retail had been undergoing a technological transformation for years, but the pandemic sharply accelerated the shift from brick-and-mortar sales to e-commerce. Prior to the outbreak, retailers had progressively put more attention on the omnichannel customer experience due to the growing popularity of online sales. The greater emphasis on e-commerce led to a stream of store closures. But the pandemic put that trend in overdrive; more than 40 major retailers, including well-known names like J.Crew, GNC and Lord & Taylor, declared bankruptcy last year. As a result, more than 11,000 stores have been slated for closure totaling 150 million square feet of retail space. And these figures are conservative; they are limited to public announcements prompted by material events and do not account for the pandemic’s impact on small businesses, which is driving totals even higher. As of Aug. 31, 2020, nearly 164,000 businesses were closed that had been marked open in early March, according to Yelp, representing close to 100,000 permanent closures.


However, it’s not all doom and gloom. While one might think e-commerce’s rise would have resulted in significant downsizing of the retail space, the national retail vacancy rate is still just two percentage points below its 2010 peak. The reason? Retailers are shifting away from selling merchandise in stores and offering experiences such as escape rooms, gyms, movie theaters and highly curated showrooms for online merchandise instead. But experiential retailers, too, are facing pandemic-induced headwinds. Extended stay-at-home protocols have pushed more people to set up their own home gyms with treadmills and Peloton bikes. How many of these users, having had a long taste of commute-free workouts, will choose to retain their gym memberships when the economy recovers? Movie theaters may also have a rocky recovery. Movie studios are ramping up their direct-to-consumer efforts, giving Netflix and Amazon Prime subscribers the ability to stream new releases. WarnerMedia’s film division recently announced that it would release all of its 2021 movies on HBO Max the same day they hit theaters. The smell of popcorn may not be enough to lure skittish customers back to seats in public movie houses.

To be sure, those retailers that have grown their online presence, coupling it with smaller, appropriately configured store fronts and improved in-store experiences, have done well. Target, for instance, has expanded its e-commerce business while continuing to sign leases and build out slimmed-down footprints ranging from 20,000 to 60,000 square feet in and around urban areas, compared to their larger 130,000-square-foot suburban stores. Another category that has performed well is necessity retail, which includes pharmacies, grocery chains and discount stores like Dollar Tree. These businesses have continued to expand their footprints to meet demand in lower-income and lower-density areas. These examples show how the retail sector is evolving to better serve the interests of the 21st century consumer.


Those retailers that have grown their online presence, coupling it with smaller, appropriately configured store fronts and improved in-store experiences, have done well.

The future of office space

Commercial office space owners, operators and tenants are experiencing a shift in their center of gravity; a year into the pandemic, the office sector hasn’t yet found its balance. The long-term trend of migration to secondary markets, along with the lure of lower-cost living and improved quality of life in areas such as the Sunbelt, persists. This migration is contributing to pressure on office space in major metro areas. Overall prospects for the sector won’t be clear until the virus is eradicated and normalized working patterns emerge. The long-term outlook for most markets isn’t straightforward—the shifting norms and preferences experienced in 2020 remain structural in nature.

A rebound in demand is expected in 2021 as office users return to physical spaces. Desires at the top of the wish list for office tenants include more flexible space options, shorter leases to support their increasingly mobile workforce and access to new markets to source talent. While some firms will embrace policies that include remote work and increased flexibility, others may chose to leave their existing real estate footprints behind altogether to chase talent. Consider investment bank Goldman Sachs, which has been scouting offices outside of New York—in South Florida—to relocate its asset management business. Meanwhile, a slew of companies has already made the move outside of Silicon Valley, as big names like Oracle and Hewlett Packard relocate to Texas, a state benefiting from recent migration patterns.

In addition to competition from the new supply of offices equipped with the latest and greatest touchless technologies, air ventilation and state-of-the-art amenities, legacy landlords must also contend with the sublet market, which has picked up as companies look to cut costs and shore up balance sheets. CoStar reports a staggering 180 million square feet of sublet additions through 2020’s fourth quarter, representing a 43% increase from a year earlier. New supply, as well as sublet supply, has been concentrated in tech hubs like Austin and San Francisco in addition to the sublet space, due largely to the ease with which the tech sector has implemented remote work. Among those companies subletting space in major cities such as New York and Chicago are Facebook, Groupon, AT&T and Marathon Petroleum.


Investors searching for the next demand generator have taken note of life sciences, which has heated up amid the search for a coronavirus vaccine. Many attractive investment markets have insufficient office space to meet the current demands of biotech and pharmaceutical companies. The transaction appetite speaks for itself: Blackstone Group’s $3.5 billion life sciences real estate portfolio purchase in December near the MIT campus and recapitalization of the firm’s BioMed Realty Trust for $14.6 billion prove that the large players are betting on the space.

While much is in flux, there is still a significant role for traditional office space. Take Google, which has continued to expand campuses in New York, Atlanta and Chicago—all core markets and part of the company’s larger diversity and inclusion strategy. The depth and diversity of talent pools in these markets can’t easily be replicated elsewhere, and continued strength of pricing of office assets in those markets reflects that premium.

While the appeal of the city life has been temporarily curtailed by the pandemic, people—including office workers—will eventually return to enjoy the vibrancy and culture of cities.


At the top of the wish list for office tenants are more flexible space options, shorter leases to support their increasingly mobile workforce and access to new markets to source talent.


Housing and industrial resilience

While sectors such as office and retail struggled in 2020, housing has seen a boom, and industrial space remains incredibly attractive. Building out infrastructure necessary to support the shifting landscape of homeowner and consumer preferences will be critical to further growth.

Single-family housing remains one of the hottest sectors of the economy, despite an initial drop from the coronavirus pandemic in March and April of 2020. Behind the surge in the single-family housing market are historically low interest rates, growing demand from millennials—many of whom had put off home ownership—and the push of city dwellers out of urban centers into sprawling suburban homes. The homebuilder confidence index has risen to all-time highs in recent months, and with it housing starts and permits have both risen above their 1.5 million long-term equilibrium.


This year it is highly unlikely that single-family housing will derail. Existing home inventories remain depleted and home sales continue to rise, creating the need for new supply, which spells continued growth for homebuilders. Even so, buyers face some challenges including a dearth of new plots of land for building and challenges maintaining affordable homes, especially with the price of lumber again rising, despite tariff reductions to 9% from 20% on Canadian lumber.

In addition to changing preferences in location, customers have made permanent changes to how they shop. Rising e-commerce trends have unleashed demand for additional warehousing. More resilient and robust distribution networks are paramount for the survival of consumer products’ retailers. Real estate private equity groups continue to pour capital into the warehouse asset class, having purchased millions of square feet of space across the country. The next five years are expected to see continued net positive absorption with over 880 million square feet yet to be filled.


Housing and industrial are bright spots in an otherwise challenging climate across sectors and will continue to benefit from shifting consumer preferences and resilient market fundamentals. Further investment in infrastructure will support residential and industrial market development.


The development of new last-mile warehousing space presents opportunities for the construction industry, as projected square footage will either be net new or repurposed existing space, both of which require remodeling. This trend shows no signs of abating amid the sustained popularity of e-commerce, which has accelerated during the pandemic.

Significant infrastructure investment is required to support the robust buildout of new homes and the enhanced distribution networks to supply them with goods and services. In particular, the roadways that crisscross the nation—known as 12E infrastructure—will be vital to supporting economic growth (see 2021 forecast from RSM Chief Economist Joe Brusuelas). The incoming Biden administration is proposing a $2 trillion infrastructure package, including $50 billion in the first year that is focused on roadways. This would match 2020 spending; however it would be less than what was spent in the three years prior.

In addition, the Fixing America’s Surface Transportation, or FAST Act, was included in a continuing resolution late last year that adds $13.6 billion to the Highway Trust Fund. At a minimum, this will allow for necessary road repairs that support the sectors of real estate fueling the recovery.

Looking ahead this year, it is expected that car travel will continue to be the most popular mode of transportation—though its use will still be below pre-pandemic levels due to its ability to support social distancing, even after vaccines are widely distributed. Therefore it is critical that infrastructure funding remains strong.



Construction: Survive to thrive

The primary resolution for many contractors this year is simple: survive the first six to nine months at which time the outlook becomes bullish on recovery for the sector.


The first half of 2021 continues to pose challenges. The Architecture Billings Index, typically a nine-to-12 month leading indicator of construction work, fell off last April, signaling severe contraction for the industry. Since then, all three of the index’s indicators (commercial/industrial, institutional and residential) have shown positive movement toward the equilibrium level of 50, with residential leading the charge. Low mortgage rates, a K-shaped recovery that has prevented significant decline in wealth for middle and upper-middle class consumers, and the need for greater space as pandemic life becomes more focused on the home have served as tailwinds.

Navigating the first half of 2021 will be critical for many contractors, in particular those without significant backlog or strong balance sheets to weather the storm. With 2019 financial data from the Construction Financial Management Association showing an average contractor has only 21.4 days of cash on hand, contractors that cannot continually replenish their backlogs won’t be able to maintain their operations. The postponement and cancellation of projects have resulted in more competition for work, driving down contract values and margins.

General contractors have reason to proceed with caution as potential subcontractor defaults are now more likely. Proper controls around preapproval and credit check processes are essential protections for contractors looking to ensure their partners have the wherewithal to complete the subcontracted work. Additionally, the health of the surety market will inform future bids and pipeline.  While surety providers have seen loss rates creep up throughout 2020, there has been no meaningful pull back on credit or tightening of financial metrics for contractors; this is welcome good news.


Although contractors face headwinds, long-term strategic goals shouldn’t necessarily be deferred. The pre-pandemic era saw a lack of skilled labor in the sector; now, with a softer market, contractors can preemptively look to fill talent gaps that position them to more fully participate in the recovery. The economic boom set to follow the sector’s contraction is likely to last multiple years due to pent up consumer demand, low interest rates and continued stimulus by the government. This, along with the Biden administration’s focus on infrastructure, should help to propel construction during the second half of 2021.

Transportation infrastructure, the elephant in the room

Prior to Joe Biden’s presidential campaign, which included a promise to restore America’s crumbling infrastructure, Presidents Donald Trump and Barack Obama had unsuccessfully attempted to pass sweeping bills on infrastructure spending.

As mentioned earlier, the nation’s infrastructure is the most commonly used form of transportation, and has gained in popularity amid the pandemic, which has wreaked havoc on air and railway transportation, the second- and third-most used transportation modes within the United States.

It is no surprise that airports have been devastated by the pandemic; even with the wide distribution of vaccines, it will likely be another two years before air traffic is restored to 2019 levels according to a survey conducted by the International Air Transport Association in October 2020.

Amid the reduction in flight revenue, airport infrastructure spending is also set to decline. One report from the American Road & Transportation Builders Association anticipates a 17% reduction in construction in 2021 compared to 2020, with growth in spending not projected to begin until 2023. Even passage of the $900 billion stimulus package in late December—which provided $2 billion for airports—the recovery is likely to be slow and elongated, leading to a continued focus on cost cutting and reduction in allocated infrastructure spend.

Despite all of this, it would be imprudent for airports with sufficient capital and the ability to reconfigure their spaces not to do so. Low interest rates, coupled with reduced project volume, is allowing work to be done more efficiently, making now a good time to invest in these existing assets, provided developers can tolerate the risks and significant volume reductions for the foreseeable future.

U.S. public transportation is the country’s Achilles’ heel, mainly because it is not big enough, doesn’t go where people need it and doesn’t operate as frequently as customers desire. Even prior to the pandemic, American ridership was low, compared to Europe.

Spending on railways has been largely focused on massive overhauls rather than improving connectivity and user experience. The average railway contract has increased over 300% from the year 2000 to 2020, according to data from the American Road & Transportation Builders Association. This increase is approximately four times the next highest category (highway), which saw an increase of 81% over the same period.

While on the surface this trend is seemingly good news for construction companies, the number of railway contracts awarded has declined steady since 2017 from a record 254 to just 144 in 2020; fewer awards with larger individual dollar amounts typically carry greater risks for the contractor.

Meanwhile, with public transportation decimated by the pandemic and set for slow recovery, future tax contracts dependent on ridership volumes and tied to tax revenue are also expected to suffer. Even with funds being allocated to Amtrak and local governments for project funding, revenue shortfalls will likely slow down the public spending train.

Nontransportation-focused infrastructure

Significant components of the new administration’s proposed infrastructure plan are tied to nontransportation initiatives, most notably, the expansion of digital broadband and the establishment of 5G capabilities. A significant infrastructure bill early in 2021 addressing these areas will help to modernize America’s infrastructure and could lead to multidecade reinvigoration of the economy.


Demand for connectivity has been driven by the pandemic and is set to continue beyond 2021. While some Americans were able to quickly shift to remote work, others had to boost internet connectivity to support working and schooling from home, moving to broadband service from dial up as evidenced by user gains experienced by leading broadband providers Charter and Comcast, whose combined usage rose 70% from the first quarter of 2020 to the third quarter.

Another anticipated development in internet connectivity is the expansion of 5G. Its rollout is predicated on the deployment of new transmission infrastructure that includes thousands of cell towers and antenna deployed on utility poles and other urban infrastructure. Much of this infrastructure construction was placed on hold as a result of the pandemic due to challenges with labor and resources; with multiple vaccine candidates now in the works, there will be a resumption of 5G infrastructure development in 2021 and beyond.


A significant infrastructure bill early in 2021 addressing aging roadways will help to modernize America’s infrastructure and could lead to multidecade reinvigoration of the economy, with direct benefit to the construction sector.

Looking ahead for real estate and construction

Resilience, re-imagination and recovery will be the primary themes for real estate and construction throughout 2021 as the long-term outlook shows light at the end of the tunnel. The perfect storm brought on by the pandemic has accelerated many digital trends, prompting nimble property managers and developers to adapt, repurpose and realign their space offerings to keep up with shifting consumer preferences.

Concurrent with those changes are many fresh opportunities for the construction sector, which will benefit from significant shifts in commercial property, a sustained boom in housing and impending buildout of U.S. infrastructure under a new administration in Washington.

Let's Talk!

Call us at (541) 342-5161 or fill out the form below and we'll contact you to discuss your specific situation.
  • Topic Name:
  • Should be Empty:

This article was written by Laura Dietzel, Troy Merkel, Scott Helberg and originally appeared on 2021-01-22.
2020 RSM US LLP. All rights reserved.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Harding, Shymanski & Company, P.S.C. is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.

For more information on how Harding, Shymanski & Company, P.S.C. can assist you, please call (800) 880-7800.

Evansville, IN 812-464-9161

21 SE Third Street, Suite 500
Evansville, IN 47708

Louisville, KY 502-584-4142

545 S Third Street, Suite 102
Louisville, KY 40202

Share This