The onset of COVID-19 has left many businesses in the U.S. tallying up losses and wondering what a recovery may look like. Not only has the pandemic exacted a significant human toll, it has also indiscriminately wreaked economic damage upon various industries at a brisk pace. The pandemic’s rapid spread has forced the closure of many businesses who in turn have lost the ability to pay rent to commercial real estate landlords.
So, what exactly is commercial real estate or “CRE”?
Commercial real estate can be defined as properties used for commerce, businesses, or utilized for income producing purposes. CRE is often segregated into a handful of broad categories. These categories might include:
- Office space
- Industrial sites, like warehouses, manufacturing, self-storage, and distribution facilities
- Multi-family properties, like apartments, or multi-family homes
- Retail
So how has CRE performed during the pandemic? Well the human and economic decimation that COVID-19 has brought to the world has affected the CRE categories listed above differently. Some CRE segments have fared better than others.
Office space is a CRE segment that has certainly felt the impact of the pandemic. Many offices across the nation are now either partially or fully vacated due to social distancing requirements. It is much easier in some cases to protect workers by sending them home to work remotely, verse risk the liability of not protecting them in an office environment where they would be working in close proximity with their colleagues. With remote work increasing in popularity, it appears that many companies are now considering downsizing their future office space requirements. KPMG recently released a survey in August 2020 that stated up to two thirds of large companies now plan to downsize their office space.
Some industrial sites such as warehouses might in some cases be considered a bright spot during the pandemic, as the consumer has adopted or increased their online purchasing. With the advent of local and state governments imposing restrictions to combat the pandemic, access for consumers to brick and mortar businesses began to decline and so did their sales. These same restriction circumstances increased online sales benefiting CRE tied to distribution. The shift away from consumers patronizing brick and mortar stores to purchasing online has increased the need to procure sites to store and distribute goods to accommodate the increased online buying trend.
With respect to the multi-family CRE, this sector has remained relatively resilient during the pandemic. Impacting multi-family housing in urban markets is the modest flight trend from the cities to the suburbs placing downward pressure on rent and vacancy metrics in cities across the U.S. As we roll into 2021, the continuing strength the multi-family market as a whole may be strongly correlated to continued governmental stimulus and the potential future success of the COVID-19 vaccination program. Despite the loss of jobs in the market place during the pandemic, the “NMHC” rent payment tracker reports that 94% of rental payments were still being made through the October 2020 report date.
The retail CRE sector has been a mixed bag with respect to performance during the pandemic. Areas holding up relatively well tended to be CRE associated with businesses labeled as essential. And for CRE associated with non-essential businesses, performance has been spotty. Many small and large retailers hit by closures or occupancy constrains are reeling economically and asking landlords for rent concessions. Strip centers, malls, and non-essential business are certainly feeling the effects of lost sales and the shift of consumer buying patterns that favor online purchasing. Conversely, essential business concerns seem to be weathering the storm.
So, what conclusions can we draw from the effects of the pandemic on CRE? Clearly there has been some sectors hit harder than others. The real question is what will be the long-term effects? The CRE market will adapt, it is just a question of what will the various segments look like a few years down the road as lifestyles change? And to what extent will workers adopt remote working patterns, return to patronize brick and mortar establishments, or take their business online? Additionally, will cities continue to experience out migration? All interesting questions to ponder as we continue to mask up, social distance, and weather the pandemic.