The Impact of COVID-19 on The Commercial Real Estate Industry Part Two

By Will Levy’21

The age of COVID-19 has been an interesting experience for everyone, especially those in the real estate industry; both commercial and residential. In a past article, I spoke about the impact of rent relief and the beginning effects of the pandemic. Now that it has become more evident that COVID-19 will not be going away in the near future, I was able to speak to the expert from my past article and discuss the recent changes to the industry. 

The expert attested to the fact that “there are limited transactions happening in the real estate market at the moment.” Most hotels and retail stores are currently experiencing great losses, but shopping centers anchored by grocery stores are still surviving. Other than stores that sell essential products, no retailers are thriving given the economic landscape. Some investors are taking advantage of the current situation and are building their portfolio for the future; eventually allowing them to profit when the pandemic is over. 

The expert also stated that “this is why it is so important to have a diverse portfolio, both of buildings and tenants.” Preparing for future risk is important to make sure that you are somewhat protected from the unexpected; for instance, a pandemic that has severely impacted the day-to-day lives of people around the world. 

According to the expert, “it is interesting that industrial properties such as warehouse and “last mile” distribution facilities have become more valuable given the current situation.” With so many Americans not leaving their homes and ordering essential products online, eCommerce has escalated and these types of buildings are in high demand. For those who own these properties, the pandemic improved their property values. The expert also noted that “with every hardship, someone will profit.” This phenomenon can definitely be seen today through the effects of COVID-19. 

The expert said, “it will take a long time to get back to normal and nothing is guaranteed for the future.” Before a vaccine is created and life returns to normal, office users are rearranging their layouts and functionalities, as well as rethinking having employees in the office. This could entail rotating workers and only having a select number present on a given day. The rest would work from home unless it was their turn to be in-person. It is expected that many companies will be working from home a lot more and Facebook even recently released a new work from the home mandate. Another strategy known as hub-and-spoke involves companies maintaining a downtown presence while leasing additional satellite offices in the suburbs, offering their employees convenience and the ability to socially distance. 

“There are two ways that this could affect the real estate market. First, there could be a negative impact due to less space being needed with fewer employees in the office at a given time. Second, conference rooms and other spaces could be replaced by flexible workspace,” stated the expert. Everyone will need to be at least six feet apart and to accomplish this, some companies may need to expand their office space. In the end the net effect may be neutral, resulting in no impact to the demand for office space. 

Unfortunately, given the current situation, many smaller companies and restaurants are going under. With the recent announcements that the summer may have similar restrictions on opening commercial areas, some have lost hope. Especially true for restaurants, it is extremely hard to maintain customers when you cannot fully open your doors to the public. The expert also said, “luckily, many landlords and others are giving rent relief, as well as deferral to tenants.” Even though this compromise has been sufficient for a short time, it is not sustainable for the future. Those who own real estate have to continue to profit, and businesses that are not able to open will face a dire situation. 

In the opinion of the expert, “particularly retail that requires person-to-person contact will face the biggest headwinds.” These include health clubs, bars, and any other businesses that require social interaction. It is a strong possibility that people, the consumers, will not feel comfortable in public areas until a vaccine is produced. At this time, some estimates project that the creation of a vaccine will not occur until 2021. In the meantime, many businesses may open at 25 to 50 percent occupancy which will significantly decrease business. If this is the case for a long period of time, some establishments may choose not to open until guidelines are lifted. 

The final interesting point brought forth by the expert is the idea that lower floor office space may become more valuable. Before the pandemic, companies often desired real estate with views from the top floors of office buildings in Boston, New York, or any other major city. Now, it is probable that many will want lower floors to prevent their employees’ exposure in elevators, as well as avoid the nuisance of elevator access due to restrictions regarding the number of riders at a given time. Everyone is interested to see what the future holds but only time will tell. 

To close, the expert stated that “no one truly knows what the future will hold.” With everything that is happening in the world, it is important to look to the future. We will get through this, it is just a question of when and how.

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