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COVID-19 Strikes Commercial Real Estate Sector

August 25, 2020

Commercial real estate has been impacted in many ways by the coronavirus pandemic. Learn how long-term repercussions will affect property demands, leases and more.

The economic turmoil from the COVID-19 pandemic has affected almost every industry. Commercial real estate (CRE) is no exception. During stay-at-home orders, many properties sat empty or only partially used — and many commercial tenants floundered. Now, experts are predicting several long-term repercussions that could cause problems for investors and developers that don’t adapt to the new norm.

Shifting Property Demands

CRE needs for office, event, retail and industrial space are expected to shift dramatically in the COVID-19 era. Is your property zoned and configured for its highest and best use?

The shift of white-collar workers from the office to their homes during the pandemic could alter the demand for office space over the long run. Many corporations have reported enhanced productivity and job satisfaction from remote working arrangements during the pandemic. To the extent that employees continue working from home, corporations may have smaller on-site staffs, less assigned workspace and fewer face-to-face meetings.

Likewise, commercial travel is expected to decline, as businesses become more comfortable with videoconferencing technology and digital signatures — and they cut back on discretionary spending. Health concerns also may result in fewer trade shows, conferences and on-site training programs. These changes could hamper demand for banquet halls, hotels and conference centers.

In addition, the pandemic might be the nail in the coffin for struggling brick-and-mortar retailers. Shoppers who had resisted online shopping for groceries, medical supplies and household goods are giving it a try while quarantining. Now that it’s becoming familiar, many are expected to continue shopping online for convenience and safety reasons.

As the demand for online shopping grows, regional data centers and “last-mile warehouses” will become crucial to fast delivery. The hunt is on for large distressed properties — such as malls and office spaces — that can be transitioned to industrial use. These properties also might surge in popularity as businesses reshore international supply chains that broke down during the pandemic.

New Expectations for Safety, Health and Cleanliness

Commercial tenants and buyers are expected to maintain their focus on health and safety, even after COVID-19 is contained. As a result, property owners have been instituting more stringent cleaning protocols, including regular deep cleaning and sanitizing practices. Some have even been investing in touch-free technologies, such as voice-activated elevator buttons and motion sensors for bathroom equipment, and using antimicrobial materials, such as copper hardware.

Some 21st century CRE trends may suddenly reverse. For example, the “densification” trend could come to an abrupt halt as the ability to socially distance takes priority. And open floor plans may need to be broken up with partitions and walls due to similar concerns about spacing.

Additionally, renovations may be needed as building officials impose new standards for square footage per person, the amount of enclosed space and HVAC systems. There is even talk that office buildings and retail stores may need to incorporate air filtration systems that have historically been used in healthcare settings.

Requests for Lease Relief

Many commercial tenants have been struggling to generate cash flow during the pandemic. As COVID-19 cases continue to surge in many parts of the United States, landlords may be fielding requests for lease concessions and rent abatements.

It’s important that building owners evaluate these requests on a case-by-case basis, rather than adopting across-the-board policies that apply to all tenants — for example, no concessions for any tenants or a 10% abatement for every tenant. Instead, owners should consider factors such as the tenant’s long-term prospects, renewal probability, default probability and vacancy rates.

Proceed with Caution

COVID-19 is proving to be a game changer for the CRE sector. Our real estate specialists can help you stay ahead of the curve and make the necessary financial adjustments to survive and thrive over the long run.

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