Looking Ahead with the Pandemic
The pandemic makes budgeting for 2021 very difficult. Looking ahead involves far more uncertainty than usual. To help, here is the outlook for a range of business costs.
The U.S. economy will return to growth after contracting this year. GDP will rise 3.5% in 2021, after declining 5.3% in 2020. But the economy will not reach its pre-COVID-19 level until late 2022.
The leisure and hospitality sector will continue to struggle until a vaccine arrives. Lingering economic uncertainty will keep the consumer savings rate at a much higher level than normal, about 15%. Inflation will pick up…1.8% at the end of 2021, up from 1.1% in 2020, still a bit below normal levels. Some of the rise will be due to increasing gasoline prices.
The cost of borrowing will remain extremely low. The prime lending rate will be 3.25%, the current level. 10-year Treasury bonds will likely be about 1%. And 30-year fixed mortgage rates will continue to be historically low…about 3%.
Corporate profits will bounce back, soaring 30% after 2020’s 23% drop. In general, look for energy costs to recover but not skyrocket in 2021, after most fell significantly this year. Assuming a solid economic rebound, energy demand figures to rise, too. But not all the way back to pre-pandemic levels. Gasoline…closer to its 2019 average of $2.60 per gallon of regular unleaded, after likely averaging about $2.15 to $2.20 for all of 2020. Figure on $2.50 or so. Diesel, a bit under $3 after averaging close to $2.50 this year. 2019’s average for diesel was $3.06. (Keep in mind, these are national averages. Individual states will see higher or lower fuel costs, but the national averages show the overall trend.) Electricity rates overall should creep up slightly. For industrial customers… Holding fairly flat on average, after dipping this year amid the recession. Residential customers will pay more as some workers keep teleworking and thus spend more time at home. They’ll likely see rates rise 2%-3% on average. Natural gas prices are likely to rise but remain low by historical standards. So far this year, gas futures have averaged $1.80 per million British thermal units, the lowest in decades. Next year, figure on an average of $2 per MMBtu or a bit more, with the retail prices customers pay following a similar trend of moderate increases. But as always, natural gas prices will depend heavily on weather patterns.
Freight shipping costs stand to be all over the map in 2021, depending on whether shippers rely on trucks, trains, ships or planes to move cargo. The pandemic and its economic fallout will continue to have effects on supply chains. Trucking rates, up only slightly after a volatile 2020 that will likely end up showing a rare decline in average rates. For 2021, think an uptick of about 2% or so. Rail, pretty close to flat. The industry will continue to face overcapacity. Ocean container freight, down 3% or so after rising by that much this year. Assuming the global economy starts to heal, carriers will put more ships in service after they idled much of their fleets this year, which led to sizable rate increases. Air freight, up strongly, but not by as much as in 2020. Lingering weakness in international air travel means fewer commercial jetliners hauling freight, too.
Average pay raises…2.5%, up from 2.0% this year. High unemployment of about 7% in 2021 means a loose labor market and less pressure to hike wages. On overall benefits compensation…costs are up in the air, as the coronavirus charts an uncertain path over the next 18 months. More firms are offering flexibility… more telecommuting, different hours, new child care policies, etc. Expect paid sick leave and paid family leave to expand to more states, many with COVID-related requirements. Payroll taxes…rising, as the wage base goes from $137,700 to $141,900. For firms that pay pension premiums to the Pension Benefit Guaranty Corp… No change in rates, except for inflation-related indexing. Flat-rate premiums for single-employer plans will hover around $83 per plan participant in 2021. Variable-rate premiums for underfunded plans will be approximately $45 per $1,000 of unfunded vested benefits (subject to a $561 or so per-participant ceiling).
Health care costs will be higher than normal due to pent-up demand. Employers that enroll with a health insurer should be in position to resist any outsize premium increases in 2021, if they didn’t see a discount this year related to lower spending as folks put off elective procedures. For self-insureds, costs in 2021 will likely rise 10%, unless delays in elective procedures continue. Prescription drug costs…up 5%, versus 3% in 2020. Treatment drugs for COVID-19 will decline in price. Vaccines are likely to be covered by employer plans. Office-administered drugs will likely rise more. Expect pricier specialty drugs. The most expensive: $2-million-per-treatment gene therapy drugs for certain illnesses.
Costs for airfare, hotel rooms and car rentals will be lower than normal, as travel remains way below usual. Note that deep discounts this year will fade as occupancy rises. Discounts on airfare and car rentals may not last if bankruptcies and an industry shakeout continue, thus reducing excess capacity. If a vaccine prompts a resurgence in leisure travel, look for prices to bump up quickly.
Office rents…a slight increase, after falling this year. De facto rents will rise in 2021 by about 2%, but tenants are in for concessions, such as rent-free months. Retail space…staying flat in 2021, after declining 2.5% this year. Warehouse rents…up about 2%, versus a mostly flat 2020. Demand for space, including cold storage, will be strong because of a surge in e-commerce. Budget more for insurance. Commercial property insurance rates… up 5%-10%, on average, for properties that aren’t exposed to natural catastrophes. For those with exposure…up 15%. Directors and officers insurance…up 10%-15% for public firms, 10% for private firms and nonprofits. Primary casualty insurance… up 5%-10%. Umbrella and excess liability rates…up anywhere from 10% to 25%. Cyberinsurance premiums…up about 5%-7% for companies renewing policies. Legal costs…up about 5% next year, on average. Many fees are negotiable. Accounting costs for a typical firm will rise between 5% and 10% in 2021.
Most tech and telecom costs will fall. Tablets and laptops…down 5%-10%. Printer and desktop PC prices will fall a lot as demand dips. Premium smartphones… flat. Lower-cost 5G models will proliferate, though. Mobile data prices…down 10% or so. Wired bandwidth will be cheaper, though it can vary widely based on location. Costs for digital advertising will rise after deep discounts this year as demand plummeted when the economic downturn hit. But costs will still be low.
The stakes are always high in any product development, but especially in real estate project developments, planned communities and new home sales programs. PTC Computer Solutions has worked closely with Parker Associates for years at understanding the Market in any environment. This is no different though the tools may be and we are working online and OPEN FOR BUSINESS.
Parker Associates has perfected several unique processes for helping developers, builders and community managers take the necessary actions to effectively plan, position, market and sell to achieve success. We apply each of these proven processes, taking them from schematic concepts to real-time strategies for feasibility, product definition, consumer identification, applied marketing tactics and monitoring mechanisms. The result is a clear series of steps to assist clients in taking new developments forward on the right foot, repositioning active projects or reviving dormant or aging master planned communities.
WHO? WHAT? HOW?
CONSUMERS COME FIRST
Real estate marketing and sales relies first upon understanding the characteristics of potential consumers and their needs and preferences — WHO are these individuals and households for a particular marketplace in terms of age, income, household size and likely behavioral patterns.
The exclusive WHO, WHAT, & HOW diagram to define your consumer as developed by Parker Associates.
Such consumer information is essential to creating the highest impact product to attract their attention — WHAT appearance and design features will match their needs and preferences at a feasible price range. For new homes, product includes regional and neighborhood attractions as well as community amenities and both the exterior and interior features of specific dwelling offerings. The tendency of consumers to relate to persons with similar age, income and household size characteristics provides a special attraction for most potential buyers.
The same consumer information provides the basis for cost-effective marketing strategies — HOW best to attract these consumers to contact the builder and visit the offerings at the most efficient time and cost outlay. Despite claims to the contrary, most real estate requires face-to-face contact with consumers to achieve sales. It cannot be sold by phone or even Internet communications.
These three simple words — WHO? WHAT? HOW? — constitute the essence of efficient marketing and sales or leasing of new homes. They are the basis for Parker Associates’ success in guiding many community developers, hoteliers, and homebuilders toward rapid sellout of all types and prices of new homes and rental apartments. With modest modifications, they can be applied directly to retail, commercial and industrial real estate as well as housing.
Contact us here at PTC Computer Solutions to help understand the retail market and business technology of today. For more on the ever evolving Retail market and how to stay involved and relevant, contact us today. We work hard to stay ahead of the cutting edge and can assist your projects in understanding where you should be putting your efforts.
David WB Parker is a principal of Parker Associates of Jacksonville, Florida, marketing consultants to the real estate industry as well as the President of PTC Computer Solutions, IT Consultants and Strategists, and also an active real estate sales professional with Barclay’s Real Estate Group. Though based out of Jacksonville, Florida, David and the team at Parker Associates have worked in 17 Countries and 33 States through the years as well as 65 out of 67 counties in Florida. David can be reached at 904-607-8763 or via email firstname.lastname@example.org.