The pandemic has had a major impact on commercial real estate. The effects have put some asset types on the fast track for growth, while other segments are struggling to adapt toward a rapidly changing future.
Below are five ways in which the commercial real estate market has transformed since last March!
1. Employers Transition to Remote Work for the Long Haul
Many large tech companies such as Facebook and Google transitioned their employees to work from home even before any shelter-in-place orders were announced. At first this approach was only temporary, but as the pandemic has progressed, the work from home policies have remained in place. Soon after, other employers across different industries and states followed suit.
CoStar data shows that most major U.S. cities still report less than 20% physical occupancy of office space as employees remain at home. According to Moody’s Analytics, 1/5 of U.S. office space is expected to remain vacant within the coming year. This sustained change is largely due to the fact that many companies are reevaluating their office usage now that they have proven employees' productivity while working from home.
Overall, it seems that many employers will continue to implement an adaptable work-from-home strategy even after the pandemic is brought under control - this trend is here to stay.
2. Suburban Office Usage to Rise
Although employers are reevaluating their space needs, which may result in smaller office footprints, it also seems clear that office usage will never become obsolete. The next twelve to eighteen months will be a key indicator for what office space changes remain. One question that arises in this is: Which submarkets will benefit from these changes, and which will not?
Statistics show that there has been a 14% - 15% decline in office space in central business districts, whereas there has only been a 7% - 8% decline in suburban office submarkets. Moving forward, we believe that suburban office spaces will be leased out in greater quantity than those in central business districts. This is, in large part, due to the fact that businesses who require office space can often find cheaper space 5-10 minutes outside of the downtown area and having a central location may be less of a priority now that virtual capabilities have been proven.
3. Large Companies slow Expansion Plans
Big businesses are now waiting and reconsidering the need for large corporate campuses since many have decided to either reduce their office footprints or shift entirely to a remote-work model. For example, REI was set to construct a massive 8-acre build to suit campus in the Pacific Northwest and decided to simply walk away.
For these larger companies, part of the trepidation towards investing in large campuses is the fear of potential lawsuits from employees. There is apprehension towards the potential repercussions of making employees feel pressured to go back into the office, which also contributes to an expanded work-from-home model and a reluctance toward expanding their office footprint.
4. Hotel Industry Struggles with Global Tourism Shutdown
The impact of the pandemic on commercial real estate has hit some property types much harder than others; and it should come as no surprise that the hotel industry has been hit disproportionately hard. Revenue per available room, a key metric for hotels, bottomed out after an 80% drop this spring, and average daily rates are estimated to be down by about 21% compared to last year.
It is estimated that it could take up to five years for the hospitality sector to fully recover, according to CoStar’s hotel research and analytics company, STR. With travel bans, capacity limits, flight cancelations, and shelter-in-place orders, the hotel industry has been struggling to even get through the pandemic and it will be an uphill battle to restore many people's trust in the safety of travel even as things return to normal.
More optimistically, the recent development of a COVID vaccine could result in a potential leisure boom, which may provide the hotel industry just what they need this year, but chances are not guaranteed.
5. Widespread Retail Slowdown Causes reduced Demand for Empty Spaces
From the start, retail businesses have been struggling to adapt to ever-changing restrictions that have been imposed. Some have prospered while many have not, causing them to reevaluate their entire business. A Yelp Economic Impact report found that an estimated 163,735 businesses have closed in the U.S. since March 1, 2020, illustrating the rapid pace of small retail closings, which, from a commercial real estate perspective, has left many spaces empty with little activity.
Additionally, this crisis has left many business owners struggling to meet lease obligations, with approximately 60% of retailers reporting that they could not pay rent. Coupled with the prediction that retail vacancy is predicted to hit a high of 5.7% this year and may not return to pre-COVID levels until 2024, many investors are unsure about the future of their retail portfolios.
Despite the many changes and challenges the COVID-19 pandemic has brought the commercial real estate industry, there are some silver linings in many of the changes we are seeing. The chief of these is the unprecedented adaptability we are seeing exhibited across all the different real estate segments. It is exciting to see some of the changes occurring and I think that many will be beneficial in the long run for those who are able to rise to the occasion and prove themselves resilient.