The complexities facing the commercial real estate industry are as varied as the number of actors and key stakeholders involved. Commercial real estate loans often make up a large portion of bank portfolios. Developers are experiencing construction delays and issues with financing. Property owners may be on the hook to complete loan and mortgage payments, and many tenants are struggling to meet their monthly rent obligations as COVID-19 shut-downs decrease profits. Each will be looking at market trends as a means to predict and prepare for the fourth quarter of 2020 and beyond.
This article offers an analysis of trends to watch for Fall 2020. I discuss the data on COVID-19 and commercial real estate, provide an overview of the novel challenges COVID-19 presents, and discuss what the future of commercial real estate may look like in the upcoming months and years.
The Data on Current Trends in Commercial Real Estate
Q2 U.S. office absorption fell into the negative for the first time in a decade, and office vacancies rose 40 points to 11.9%. Sales volume has fallen over 70% YOY as investors remain cautious and move more slowly amidst COVID-19. These data align with Guirguis et al.’s prediction, written in May 2020, which posits negative absorption rates for U.S. office space beginning in Q2 2020 that reach a low in the third quarter, before increasing again in 2021.
Ample data makes for easy analysis of commercial office space. It is not just offices, however, that are suffering. Senior living spaces, retail, and hospitality-based businesses are all facing declines in sales. This puts pressure on landlords, developers, and financial institutions in a trickle-down effect that spares few. Still, commercial transactions have not ceased entirely and investors will want to consider their risk adversity as they decide what kinds of commercial real estate might make for better or more appropriate acquisitions going forward.
Novel Challenges of COVID-19 to Commercial Real Estate
When economic disaster strikes, it’s only smart to look back and see how institutions managed previous whirlwinds. Unfortunately, the 2008 recession doesn’t function well as a guide to commercial real estate investments in the COVID-19 world. In typical recessions, industries such as healthcare and senior and student housing have been mostly safe from economic pressures. COVID-19 has affected these sectors, however, just as it has retail and office space. Though there are lessons to be learned from the past, COVID-19 will require commercial real estate professionals to spend time developing insights and promoting forward-thinking plans of action to make or maintain their investments.
Looking to the Future of Commercial Real Estate
In many ways, COVID-19 has accelerated existing trends that have pushed consumers towards online shopping, work, and even school. Commercial real estate professionals should take this into account: even when the pandemic is over, things may never return to “normal.” The world is becoming increasingly dependent on technological resources, and supply chains are being optimized for e-commerce. As this trend continues to grow, industrial centers, storage facilities, and data centers may start to see higher demand – and valuation – than more traditional assets such as housing and office developments.
Investors and developers should also consider how these behavioral changes might impact the design of new communal spaces. Offices went through a shift not long ago that saw more open-floor plans and less privacy and physical barriers between employees. This trend may have reached its peak now that social distancing has become the new norm. Likewise, the increase in work-from-home and remote employment may be here to stay. Offices might become more of a “destination” than a consistent workplace. Thus, some companies may decide to use a single centralized headquarters in larger cities, for example, but then expand to suburban “hubs” that can be more easily accessed and optimized for social distancing measures. Real estate industry professionals should consider these factors before making investment and development decisions.
Although commercial real estate may be in a downturn, there is light at the end of the tunnel. Reaching it, however, will require careful planning by investors, banks, developers, owners, and even tenants. It will take a coordinated approach to overcome the difficulties of COVID-19, but it can be done. Indeed, real estate professionals will play a key role in determining what, exactly, our post-pandemic future looks like.
Holden Legal Group specializes in commercial real estate transactions and business law. You can contact Holden Legal Group at holden-legal.com or firstname.lastname@example.org. A qualified financial advisor and broker should be consulted before making any investment decisions.