The COVID-19 pandemic has shaken up the economy and upended many industries, including commercial real estate (CRE). Moving forward, CRE leaders should prepare for changes in how business is conducted and what buyers and tenants deem important in the commercial real estate space.
All CRE sectors are feeling the effects of COVID-19. Before the pandemic, CRE was healthy; 75% of respondents to a survey conducted in the summer of 2019 by consulting firm Deloitte expected capital availability to increase this year.
The outlook has since changed. United States financial markets declined. The impact of the pandemic has reached across many players in the industry, including property owners, brokers, and developers.
In fact, according to Visual Capitalist:
“Delinquency rates across commercial properties have shot up faster than at any other time.
“As thousands of restaurants, hotels, and local businesses in the U.S. struggle to stay open, delinquency rates across commercial mortgage-backed securities (CMBS)—fixed income investments backed by a pool of commercial mortgages—have tripled in three months to 10.32%.
“In just a few months, delinquency rates have already effectively reached their 2012 peaks. To put this in perspective, consider that it took well over two years for mortgage delinquency rates to reach the same historic levels in the aftermath of the housing crisis of 2009.”
With so many businesses mandated to close, rent relief has been requested by tenants, including those in industrial, office, and retail spaces. This in turn caused some property owners to face short-term liquidity management issues.
Further, the number of new investments dipped amid valuation concerns. In April, Realtors reported a decline of more than 30% in buyer traffic, according to Deloitte.
Development timelines have also been impacted, as many construction firms delayed or suspended projects due to a shortage of materials or personal protective equipment.
To help keep real estate transactions on schedule, CRE companies are relying more on virtual tours to lease or sell properties as social distancing guidelines temporarily limit or halt in-person showings.
In the workplace, the design of the space will likely be shifted. Options that encourage collaboration, such as benching and hoteling, may be unpopular. Desks will likely be laid out to allow at least 6 feet of space around them for social distancing.
Preparing for Recovery
Each CRE business will determine its own best path for recovery from the COVID-19 pandemic.
Among the steps will be the realization that end-users of real estate space will be looking for different space qualities than they did before the pandemic. For instance, companies should consider how to better sanitize and configure space to assuage ongoing health concerns and comply with social distancing guidelines.
Rents also may be negotiated and adjusted for commercial tenants whose revenues dropped amid reduced business or government-mandated closures. Some fees might be waived or landlords and tenants could consider reducing rent in exchange for extending a lease.
Real estate brokers and owners should expand and improve virtual property tours as they become more important for buyers and tenants.
Should You Invest
The amount of real estate investments has decreased significantly since the pandemic began. At the same time, there are some opportunistic buyers looking for good values in the real estate market. It is still difficult to assess risk, as it is unknown how long the pandemic will last and its overall impact on property valuations. Lending markets also are still unstable.
Public concern about the virus might cause some businesses such as movie theaters and malls to experience decreased traffic for weeks or months after reopening. When shopping and travel begin to stabilize, it will be clearer what commercial properties are worth.
Investors should also consider costs to upgrade and redesign space to conform to new health concerns and federal guidelines.
The pandemic affected the way people use and interact in public space and likely will have lasting impacts on CRE. The CRE market is responding to the pandemic by preparing for reopening sectors including restaurants, retail, and offices. Businesses will then begin a period of re-entry by sending employees back to work, and that phase will be followed by a “new normal,” predicts real estate firm JLL.
This new normal will vary by sector. Offices will look to lower employee density by adjusting the workspace and possibly using more coworking facilities. Restaurants are changing their business models to offer more takeout and delivery, and gyms have pivoted to introduce more online workouts. Hotels also could face lasting impacts of reduced business and leisure travel.
As government-mandated restrictions remain in flux, it is difficult to predict what the full impact will be on CRE. But real estate executives are already starting to navigate and consider what changes are necessary to accommodate both end-users and investors.
How do you see commercial real estate changing in the future?
Share your predictions in the comments below.