Following the outbreak of COVID-19, federal and state governments imposed strict measures to curb the spread of the disease, leading to an unprecedented crisis.
One of the hardest-hit sectors was commercial real estate (CRE). In the months that followed, empty offices, abandoned malls, silent bars, and closed restaurants became symbols of social distancing and limited interactions among people.
As of April 2020, hotel and retail real estate investment trusts (REIT) indices were down more than 48% each, while CRE transactions declined by more than 30%.
As a result of the pandemic, the lack of demand for space caused shutdowns, quarantines, remote work, social distancing, and layoffs. Below are a few challenges CRE subsectors face post-pandemic.
1. Remote Work, Developers, and Builders
At the beginning and during the height of the pandemic, people were comfortable with working from home. Offices closed as companies implemented social distancing. Now that things are slowly getting back to normal, the demand for office space is starting to gain traction, but with a twist.
Pre-pandemic, there was a high demand for offices with gyms, meeting rooms, and lounge areas. Now, workers demand better indoor air quality, appropriate distancing among cubicles, and touchless technologies.
These new demands force developers and builders to modify building plans to suit these new requirements. CRE firms are also developing flexible working arrangements and repurposing space for alternate uses.
There is an increased demand for a talented workforce to make structural and design changes to accommodate the new requirements for office space post-pandemic.
On the other hand, the companies downsized to smaller buildings to accommodate the smaller in-person workforce. And, because of adopting new hybrid working models, most companies may not return to larger buildings and offices.
Developers’ cash flows and project timelines are affected by the slow pace of activity and zero movements in certain types of constructions. That’s to do with the shutdown of industries worldwide, causing a shortage of raw materials and protective equipment.
Active project sites still have to adhere to guidelines such as cleaning common areas and social distancing, which slow down development projects.
2. Lending
Some loan industries will fare better than others. Banks will develop appetites for newer projects. The hotel and hospitality sector will be the hardest to finance because the travel industry is yet to reach full capacity.
Retail and restaurants are still in limbo, even though there is a positive upward trend as the sector returns to normal.
Because of working from home, some companies may adopt a hybrid model embracing working from both home and the office. It will result in a reduced need for office space. That said, the need for offices for medical use is still strong and growing, so it won’t be as difficult to secure financing.
Industrial warehouses still have huge customers like Amazon experiencing increased activity due to a rise in eCommerce. Therefore, warehouses still command the most substantial rents and attract high demand, making them easy to finance.
You can expect to see an increase in demand for loans and increased supply from banks as businesses try to resume to pre-pandemic levels.
3. Real Estate Investment Trusts (REITs)
Retail and hotel REITs went down by up to 53%. Leases in these two segments face pressure because of tenants’ businesses and liquidity tanking. Percentage rents and base rents are equally affected because of business shutdowns.
Brokers feel the heat of buyers and sellers who are currently taking the wait-and-see approach. Property touring is slowly rising, but it is still not at pre-pandemic levels.
4. Occupancy Rates for Physical Retail spaces
Even before the pandemic, retail stores struggled to attract in-person shoppers because of the growing popularity of e-commerce.
When the pandemic hit and the authorities forced retail stores to close down, this further fueled the growth of online shopping. E-commerce grew by over 30% in 2020, leading to a massive $791 billion in sales.
However, it is not all doom and gloom for some types of retail stores. For instance, smaller retail shops have recovered by opening their doors. These retailers rely on community support and customer loyalty to attract in-person shoppers.
5. Industrial Spaces
You cannot perform many industrial jobs remotely, so properties in this industry such as warehouses, storage facilities, and distribution centers did not face a significant decline during the pandemic. Also, many employees still go to work in person in this sector.
The increased demand in e-commerce led to a rise in demand for space for shopping inventory. Also, an increased need for grocery shopping deliveries led to a higher demand for refrigerated food storage spaces.
Similarly, advancements in technology have led to a higher need for data storage facilities. These trends show that this sector did not face a blow like other sectors in CRE. The demand for these facilities will continue to grow.
6. Housing Spaces
Without the need to work at the office, many workers suddenly became remote workers, causing a massive shift in the housing market.
That led to an increased demand for homes with office spaces, helping reduce the need for workers to live in densely populated areas. The shift led to a rise in occupancy rates in suburban areas and a decrease in major city’s occupancy.
Further, the increased demand for these properties led to a spike in housing prices, making it harder to secure affordable housing. In turn, this also contributed to lower occupancy rates.
7. Restaurant and Hotel Industry
It is one of the CRE subsectors that took the biggest hit during the pandemic, with reported losses of up to $240 billion. Social distancing caused people to refrain from leisure activities like eating out and traveling.
During the first wave of the virus, restaurants had to rely on outdoor seating and takeout services. Restaurant sales dropped by 34%, leading to the closure of approximately 100,000 businesses in 2020.
In 2021, restaurants started reopening gradually, helping the economic recovery. As for the hotel industry, hotels experienced up to 50% losses from low room occupancy rates.
In 2022, these are slowly resuming for business trips and vacations, but occupancy rates are still low. The hotel industry can still expect to experience low occupancy rates for the next 2-3 years.
Conclusion
The economy is looking to open up due to a reduction in infection rates of the COVID-19 virus. People are going back to offices and businesses reopening, but that’s not to say the commercial real estate (CRE) did not face some challenges during and after the height of the pandemic.
The economic challenges of COVID-19 on CRE was a real mixed bag, as the restaurant and hotel industries were all but extinguished. In contrast, the warehouses and storage space industry experienced booming business.
The pandemic may be on its deathbed, but there is no denying COVID’s impact on commercial real estate now and well into the near future.
