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

By Will Levy’21

COVID-19 has created a new normal for many Americans. This uncertainty has led to negative effects on the economy, including the real estate market. I was able to conduct an interview with a local expert in the field of commercial real estate. The expert attested to the fact that although many people see the direct impact of COVID-19 on the stock market, most do not yet realize the broader impact, including that on real estate. 

“Essentially, all real estate transactions are halted at the moment.” With this being said, businesses will begin to recover once the economy reopens. In order to achieve this goal, the country must successfully “flatten the curve of the virus.” It is important for people to remember that there is no need to panic, at least not at this point, stating, “tenants will likely receive assistance from the government stimulus packages helping them to survive, including small businesses and restaurants.” Without customers and a steady stream of income, these establishments will not be able to pay rent after a few months, leaving landlords and investors to pay the price. The expert also attested to the fact that “restaurants, salons, gyms, and health clubs are most at risk due to their lack of customers during social distancing.” 

A common misperception in the commercial real estate industry is that tenants have the right to rent relief if they are not using their commercial space. As seen on the news, many landlords are granting relief to help save businesses, but there is no requirement on their part. “Most leases grant rent relief for tenants when damages or natural disasters occur, but a pandemic is often not included in the agreement,” the expert continued. Even though many landlords and investors are granting rent relief to small businesses who are struggling, others who are financially stable should be expected to pay. After all, the building owners are a business as well and may even have stakeholders to whom they are accountable. 

There are two major reasons for granting rent relief, according to the expert. “First, building owners can stabilize their investments by allowing tenants to take part in a pay-back program.” Not only will this allow the tenant to eventually pay back their debt, but it will also help to stabilize cash flows. In return, this could help to preserve the value of the property. “Second, if a tenant is struggling, forgiving their rent in return for an extended lease helps to retain the tenant.” If a business closes, the landlord now needs to find a replacement to fill the vacated space and also pay to refresh the building for the next tenant. As expected, this can be very hard at times, especially in a down economy in the midst of a pandemic. Lastly, giving rent relief to tenants who are struggling is a way to spread kindness and build stronger bonds during tough times like these.

The expert believes that COVID-19 will have a lasting impact on the future of the commercial real estate industry, saying, “the popular phenomenon of open or flexible office space may become less optimal for businesses.” People will continue to be more cautious in the future when it comes to social distancing and limiting unnecessary contact. This could be accomplished by lessening the use of cubicles or workstations and instead of creating more offices, or having an increased number of employees work from home. Now that people are accustomed to using platforms, such as Zoom, it will be much easier to facilitate remote interfaces for meetings and communications in the future. 

“Many people will also limit the amount of time they spend in confined spaces with others, including other property types such as movie theaters, health clubs, restaurants, and sports arenas.” This would not only hurt these businesses but also likely make commercial real estate less valuable in the future. These current circumstances make it very hard to value buildings and more evaluation will need to be done when the peak of COVID-19 passes to assess the true impact on the changing market. In the future, “buildings may also require new infrastructure for safety. Similarly to the installation of metal detectors in large buildings after 9/11, there may be the need for heat sensors to determine if those entering the building have a fever.” Technologies like these could help prevent another pandemic in the future and hopefully protect others from becoming infected by the spread of the Coronavirus. 

At the end of the interview, the expert wanted to reiterate that “with all of the suffering, loss, and pain in the country right now, it is important to remember that we will come out the other side.” When we do, we must reflect on this challenging time and plan for the future. Not only to learn from our mistakes but also to make sure that this does not happen again.“We will get through this as long as we stick together.”

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