The COVID-19 crisis has had a significant impact on industries and markets across the globe, and that includes commercial real estate (CRE) in the U.S. From industrial to multifamily to retail to office space, all segments felt the shockwave on some level, with some areas influenced more than others.
According to a survey from the Counselors of Real Estate, a commercial trade group for CRE designees and an affiliate of the National Association of REALTORS®, COVID-19 stands to be the leading concern in commercial real estate for the foreseeable future.
The survey found that several areas would be impacted:
- Leisure and hospitality, retail, air travel and construction will experience a slow and partial rebound into 2022.
- Reduced migration will hurt demand for residential, hospitality and retail real estate.
- Many classic retail formats and retailers will not recover, requiring redevelopment.
- Forced adoption of technology will lead to the construction of smarter buildings.
NAR has shared a few resources for industry practitioners in the commercial space to help them navigate the changing landscape.
Here’s what the industry has to say:
“The most dramatic impact is in the hospitalities—they’ve been crushed, and people are questioning if they’re going to have discretionary income,” says Kevin Taub, vice president of the Property Owners Association of New Jersey (POANJ) and a sales associate at Marcus & Millichap. “Average daily occupancies have been dropping dramatically.”
While major companies—for example, Disney, Taub remarks—may be able to take a hit, with the precautionary measures that are currently required to slow the spread of COVID, others may not fare as well.
“They have to do incredible social distancing and take massive efforts to make sure that everything is clean—that cost is going to be prohibitive,” Taub says.
Cleanliness is a significant factor when it comes to coronavirus impact in the CRE space. According to Thomas Bisacquino, president and CEO of the Commercial Real Estate Development Association (NAIOP), personal safety became a priority overnight at the start of the outbreak, shifting the landscape for all building owners “in the blink of an eye.”
“People are now saying, ‘I need to social distance and I want to know how well the building is sanitized,” says Bisacquino. But for building owners whose tenants are lagging behind on rents, meeting those cleanliness standards becomes a massive financial roadblock.
Delays in Rent Payments
“We are seeing a seismic shift,” says Bisacquino. “Many tenants had their revenue stream curtailed rather quickly and severely, so their ability to pay rent has become an issue.”
How have tenants navigated the new financial strain imposed by coronavirus-related shutdowns? Several practitioners report challenges with tenants being able to pay their rents, but also flexibility among landlords and various programs in place to help alleviate the burden.
“Building owners and landlords are offering financial incentives to tenants, along with payment plans, to work with them during the crisis,” says Sharif Hatab, a licensed residential and commercial real estate associate in New Jersey and Pennsylvania for Berkshire Hathaway HomeServices Fox & Roach.
Bisacquino reports that landlords and property owners are doing everything they can to preserve their relationships with existing tenants, and for many that means offering rent deferrals, but not abatements.
“Whether it’s for 30 or 60 or 90 days, that’s up to the individual tenant and landlord,” says Bisacquino, adding that he’s now seeing a drop off in deferrals as the economy slowly improves, as does cash flow.
To preserve existing long-term landlord and tenant relationships, says Chris Dendtler, partner at TRC Capital Partners and landlord at 1001 McKinney in Houston, the defer-and-extend strategy creates “a real win-win.”
“Landlords care about term, and where tenants are willing to extend their leases now for three to five years, landlords are likely to agree to free rent or deferred rent immediately as a concession,” says Dendtler. ” Flexibility in lease terms is also attractive to tenants who don’t know what their business will look like 12 months from now. That means lots of one-year extensions and even new tenants looking for one-year terms with minimal tenant improvements.”
A Change in Office Trends
When it comes to office buildings, an entirely new challenge has emerged—work from home became the norm with stay-at-home orders, but the trend could linger even post-COVID.
“The widely reported expectation is that office tenants will allow greater numbers of their employees to work from home for the foreseeable future,” says Dendtler.
However, some industry practitioners are not so sure the remote work trend will flip the office space industry on its head. Instead, what may change is the office footprint and layout, with businesses continuing to offer brick-and-mortar locations.
“It remains to be seen whether tenants will, in turn, seek more office-intensive, rather than open, floorplans—a trend which could more than offset lost demand from the increased adoption of remote work,” says Dendtler.
Bisacquino agrees, stating that while some individuals enjoy teleworking, many also prefer the social interaction that comes with offices, and with social distancing measures in place, that might mean tenants are looking to increase their space, not get rid of it.
“It’s going to change how offices will be configured, but it’s not going to diminish demand,” says Bisacquino.
An Industry-Wide Impact
As the commercial segment trickles into nearly every aspect of everyday life, it becomes almost impossible to determine how the coronavirus has impacted and will continue to influence individuals from owner down to tenant and then down to consumer.
Retail was hit hard, says Taub—especially mom-and-pop shops.
“Everyone who had some kind of liquidity stockpiled had to burn through it to preserve the business,” says Taub, who is leaning on his eight-year tenure as an agent, as well as his banking background, to leverage his expertise in all asset classes so he can navigate these new waters.
It’s not all negative news, however. In the industrial segment, says Taub, “the need for industrial space has been exploding because of huge online purchasing happening.”
A survey from the Real Estate Economic Forecast, published by the Urban Land Institute (ULI), states that the industrial sector will lead all property types in rent growth from 2020 through 2022, averaging 2.2 percent per year.
Overall, ULI predicts that hotels will be hardest hit, with the average occupancy rate dropping 40.1 percent in 2020, while retail closures will lead to an availability increase of 300 basis points to 11.6 percent in 2020, continuing to rise in 2021 before plateauing in 2022.
Taub says while the multifamily sector was hit, it was not as dramatic as people expected, depending on asset class.
“As you go down the socio-economic scale, the impact was greater,” says Taub. “Asset Class A was minimally impacted on valuations, and on B it was about a 5 percent drop on valuations—C was slightly higher than that.”
Recovery and Long-Term Outlook
While it’s difficult to predict what’s to come as multiple states are currently seeing a spike in coronavirus cases in their advanced reopening phases, the industry remains hopeful.
According to ULI, commercial real estate prices are projected to fall by 7 percent in 2020, which is relatively low compared to the 13.6 percent and 20.8 percent price decreases during 2008 and 2009, respectively.
Additionally, according to a report from CommercialCafe, commercial real estate listing website, online traffic for commercial real estate search keywords has increased since March. Since the first week in May, there have been six consecutive weeks of near-continuous growth, with an 11 percent increase between May 31 and June 6.
“The commercial space was strong prior to COVID and I see it recovering quickly after,” says Hatab. “The economy seems to be leveling off closer to pre-COVID numbers, and the commercial space normally follows the economic trend.”
Bisacquino reminds the industry that the U.S. is currently dealing with a health crisis and not a financial crisis.
“It really is a very different kind of scenario from the 2008-2009 downturn, and that’s why a lot of folks are relatively bullish with their outlook and remain optimistic.”
Taub agrees, stating that the commercial segment is ahead of the curve in technology, which is helping to weather the storm. However, he says recovery will largely be dependent on regional factors.
“It’s going to be a regional kind of situation as states work through their second waves,” says Taub. “Unlike the last economic downturn, this was not caused by a lack of liquidity or inability of banks to output funds; this was caused by a stimulus outside the economic world so there are pent-up funds for acquisitions and plenty of opportunistic funds.”
Liz Dominguez is RISMedia’s senior online editor. Email her your real estate news ideas to email@example.com.