September 24, 2020
The global pandemic in 2020 has had an unusually rapid impact on commercial real estate (CRE). Although CRE was in a strong position at the end of 2019 with optimistic projections coming into 2020, most sectors have experienced some sort of turmoil related to the pandemic and measures put in place in response to the pandemic.
By mid-2020, we have established a new normal that will inevitably change as the situation develops.
Short-Term CRE Impacts
Specific sectors of CRE have come to almost a complete stop in response to the pandemic while others have grown and may continue to grow.
Office, hospitality, and retail are the hardest hit sectors. As companies normalize working from home, planned expansions, renewals, moves, or new space rentals are being put on hold. Office spaces are not disappearing altogether, but the use of space is shrinking and changing to accommodate the short-term needs of businesses to implement social distancing measures.
Retail is also seeing struggles as fewer new businesses are opening, many are closing down, and others are shrinking the size of their retail stores. In the short-term, the pandemic has accelerated the trend of retail moving online, speeding up the timeline for companies who were already considering a transition to greater online sales.
Hospitality has seen devastating effects from the restrictions and pandemic responses around the world. Fewer people are traveling and going out in general. While the industry is taking huge hits in 2020, this is expected to be a short-term impact. As soon as restrictions are lifted, hospitality is expected to recover. With short-term support from local and federal government, hospitality real estate investments might be able to weather the storm.
Long-Term CRE Impacts
In terms of years, the impact of the pandemic is less certain. The sense of normalcy that surrounds the lockdowns, social distancing, and other restrictions is unlikely to be permanent. While some cultural changes are likely to take place, especially in the way we work and how we interact with public spaces, both people and economies tend to have short memories.
Of all the CRE sectors likely to face long-term impacts, retail and industrial face the most uncertainty, although it’s not all negative. The acceleration in switching to e-commerce means higher demand for industrial processing space and lower demand for customer-facing retail properties.
In the retail and office sectors specifically, rental prices may drop significantly in response to the increased vacancy rates. Fewer leases are being signed or renewed, leading to higher vacancy rates across the US that will inevitably trigger a decrease in price per square foot if it continues.
CRE in some sectors has seen short-term growth that may begin a trend to long-term growth. Most CRE connected to tech industries has fared well throughout 2020, as growth in the demand for online products and services has increased.
Market uncertainty isn’t all bad news. Because of the strong positions of many investors and owners going into 2020, uncertainty has not been as universally devastating as it was during the last economic crisis in 2008.
Companies, investors, developers, and individuals connected to the CRE marketplace must shape the new normal post-COVID. By watching market conditions carefully and responding appropriately, CRE can thrive by taking advantage of new opportunities, reassessing tenant priorities, and moving with shifts in the market.
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