According to a recent Well’s Fargo economic report: the forecast for the level of services spending is expected to swell to more than four and a half years of typical spending packed into nine months. What does this transition from goods to services mean for real estate? Who will the winners and losers be?

What was in the data regarding a shift from durable goods to services?

  • Well’s Fargo Recently Reported a “seismic shift” in consumer spending:
    • The robust economic rebound over the past year has been driven largely by consumer spending and while the bulk of that spending has so far been on goods, a seismic shift to the much-larger services category is imminent. Our forecast looks for the service sector to see the equivalent of more than four years of typical spending packed into the remaining three quarters of this year—it is an earthquake. This is central to our above consensus forecast for consumer spending this year and this report looks at the important role that leisure spending plays in this unprecedented surge.
    • Consumers are flush with cash, and over the past year, when given the opportunity to spend, without exception they have. Outlays on both durable and nondurable goods have fully recovered and gone on to new highs. Even within services, in the places where people can spend their money like housing, financial activities and even health care, spending has fully recovered pandemic-related losses. For the most part, it is just the fun stuff that is left—the activities that have been out-of-bounds amid restrictions and social distancing requirements. Leisure spending on things like dining out, hotels, travel and various categories of recreational services will be a key engine of growth over the next few quarters.
  • Consumer confidence report: The recent consumer confidence report is backing up Wells Fargo’s predictions as Consumers in Tuesday’s report said they were less likely to purchase cars, homes and major appliances in the next six months.(Bloomberg).  I am seeing this on the ground as more people are vacationing, flying, eating out, etc… The shift is real and happening today.

What does the transition from goods to services mean for real estate?

In essence there is a pot of money that consumers have; they can spend this pot of money in various ways. As more money is spent on one item there is less for others.    During the lockdown with entertainment options outside the house limited, there was a huge “nesting” instinct with large expenditures on homes including new purchases, remodels, appliance and furniture updates, etc.. now the mindset is shifting to spending more disposable income on restaurants/ bars, travel, entertainment, etc…  As consumers spend more on services there will be less demand and cash for durable goods like houses.

The change in spending patterns will also usher in more traditional demand patterns.  When Covid struck there was a flight out of urban areas as many of the services people demanded from restaurants, museums, sporting events, etc… were closed.  As these services reopen and demand increases, the desirability of these areas will also return.  The shift from goods to services will usher in the trend to move back into the urban areas to be closer to the various opportunities the large cities offer.

Who will win in real estate from the transition from goods to services?

  • Residential: Look for Urban areas to continue to gain favor as more rural areas lose momentum as buyer migrate back to larger markets.
  • Commercial: The office is not dead, look for office use to increase drastically over the next several months as vaccines continue to be distributed and companies yearn for the face-to-face interaction of employees. This migration back to the office will also further drive residential real estate in larger urban markets.  Furthermore, the entertainment districts in larger cities including stadiums, bars, restaurants will come roaring back.

What real estate will  lose in the transition back to entertainment spending?

  • Residential: Rural and even many suburban markets will begin to cool. As offices, schools, etc.. reopen just as in the past, buyers will migrate to areas close to these areas and the amenities they provide.  The market after Covid will look very similar to the past with well educated urban areas continuing to draw in buyers.
  • Commercial: As the city migration occurs, suburban and exurban markets will soften especially in retail, restaurants, etc…  As people get back into the office and there old patterns, their spending patterns will resume with lunch, coffee, and various services close to their workplace gaining and other locations farther from work losing ground.

Summary

The transition from goods to services is well underway and consumers are showing that their old spending habits are coming back strong.  This shift to “recreational” spending will have implications for real estate with Urban core locations becoming more desirable while suburban/exurban/rural locations cool off.  The transition will not be immediate but look for this to play out over the second half of 21 with a big push in the fall as the majority off businesses have picked that date to be fully back in the office and schools/daycares to be fully open.

 

Additional Reading/Resources

 

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

 

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