Change on the Horizon for Post-Coronavirus Commercial Real Estate Industry

Apr 17, 2020

Change on the Horizon for Post-Coronavirus Commercial Real Estate Industry
By: Judy Troiano, CCIM, CIPS, Corporate Services

“Where is commercial real estate today?”
“What has the pandemic done to commercial real estate?”
“How is the commercial real estate office sector doing?”

I’ve been asked these questions nearly every day since the shelter-in-place restrictions began. It’s a new world order and, as such, there will be winners and losers. For some, the pandemic simply sped up their demise. For others, it will just be an ugly blip on their radar.

Industrial real estate was a shining star prior to the Coronavirus outbreak. However, with restrictions on all travel, including trips to the grocery store, the number of e-commerce deliveries have skyrocketed.

As many of us have been severely, negatively affected by the disease, fear of the virus will linger as we go back to our “normal” lives again. It is that fear, as well as the convenience, that will keep the e-commerce orders coming.

Both grocery and drug stores have been performing well. In the recent past, there had been chatter about e-commerce all but annihilating grocery stores, however, this pandemic seems to have put paid to that idea. It seems evident many of us are willing to don gloves and face masks and run the risk of catching a highly contagious virus rather than order our grocery items online. I am one such person.

On the flip side, clothing sales fell more than 50% in March and auto sales dropped 25%. This decline is the largest monthly decrease on record and follows a report that more than 16 million Americans have filed for unemployment. The drop is twice as large as the previous record of 3.9%, which occurred in November 2008 during the financial crisis.

Retailers like Forever 21 and J.C. Penney have been hanging on by a thread, while Sears and Kmart have been dying a slow death for years. Today, most retailers are losing cash rapidly while they wait for permission to reopen. But how many of us will be eager to go to a mall while concern for the virus still persists? That reason alone might be enough to worry retailers. Add to this the multitude of people who have been furloughed or lost their job entirely and it paints a grim picture for the retail sector.

While this sector is one feeling the most pain, it will rebound. We are social beings and eventually conventions and conferences will begin again.

Additionally, having been tethered to our homes for what most feel is far too long, many will be anxious to see the day when they can travel to visit their families and/or go on vacation again. Summer 2020 will most likely be a bust for those whose plans included a flight to Europe or Anguilla, or just about anywhere.  Once families begin to feel comfortable again putting a vacation together, air travel will remain concerning for many.  Road trip anyone? 

Before the COVID-19 crisis started, 5.3% of Americans — more than 8.2 million people — worked from home, according to a 2018 U.S. Census report.

No one knows exactly what our new normal will look like but we do know our office environments will change.

As for a huge wave of workers permanently working remotely, this is less likely. Working remotely works, but it’s not for everyone. There will be corporations that increase the number of their remote workers as a result of our current situation but there will also be corporations that increase their footprint as a direct result of the pandemic.

Those employees that do go back to an office are going to look for a comfort level from their employer as to the safety and cleanliness of their work environment. Landlords are reassessing their buildings, determining how to improve their cleaning protocols, enhance air filtration, increase automation and voice technology, etc.  Employers may rotate employees and employ less density, to name but a few.

Office design was already moving away from the open floor plan. The pandemic has simply sped up the process

There has been talk of a downturn coming for a few years now. One of the wild cards was coworking. How would it fair?

With short lease terms and small square footage needs, office tenants who occupy space within the coworking model are among the first to jump ship in a downturn. Why? It is far easier for a single proprietor with a six month lease to pull up stakes and work from home than it is for a 500 employee corporation with seven years left on its lease to do so.

Also, coworking has the additional negative aspect of a sharing model. In other words, varying tenants (strangers) under one roof share the kitchen counter, the ping pong table, the coffee maker, etc. This is no longer appealing with a pandemic clearly in our midst. Some coworking operators will survive the pandemic. Many others will not.

 Senior Housing (Assisted Living, Independent Living, Nursing Homes)

Due to this sector’s more vulnerable population, the short and mid-term views are less favorable. Seniors who were interested in moving to an independent living type environment may now choose to delay that decision out of fear of the density of these facilities. Having said that, assisted-living facilities will likely see less of a downturn as this section of senior housing is need-driven.

Medical Office Buildings
Although many medical office buildings have closed temporarily, the sector will rebound quickly. This property type had solid fundamentals in place prior to the virus, setting it on track to weather the storm. With an aging population and ever-expanding treatment options, medical office buildings, especially newer, well-located assets, will be in high demand.

It’s a mixed bag here. On the one hand, multifamily owners have many renters who have missed April’s rent payment. The coming months will bring even more renters that cannot pay. On the other hand, those who were close to securing a first home will now be putting that purchase on hold and continue to rent as they recover financially. Owners of stabilized buildings in major cities will survive and come out the other side with just a few bruises.

One clear winner in all this – real estate attorneys.  The COVID-19 pandemic is significantly impacting many tenants’ ability to perform certain obligations of their leases.  Chief among them; payment of their rent.  With so many businesses shuttered, these tenants are looking for relief from their rental obligation.  As tenants scramble and look to their lease documents for answers, enter the force majeure clause.  In business circles, “force majeure” describes those uncontrollable events (war, extreme weather, labor stoppages) that are not the fault of any party and that make it difficult or impossible to carry out normal business. 

Landlords are being called upon daily to work with/give relief/assist various tenants during this trying time. But there is no one-size-fits-all answer.  It has fallen to the real estate attorneys to help sort through the mess.