What Shape Will the Commercial Real Estate Market Be In After COVID-19?
Updated: Jun 2, 2020
COVID-19 blindsided the commercial real estate industry. Unlike previous pandemics such as SARS (Severe Acute Respiratory Syndrome) and MERS (Middle East Respiratory Syndrome), this novel virus shut down the United States’ economy and brought most of the world to its knees.
What impact has this had on the commercial real estate industry and what impact will it have going forward? Here are the following impacts the commercial real estate industry will face. First, certain sectors of the economy have been affected so dramatically that the market will be changed for years. These sectors include restaurants, department stores, movie theaters, convention centers, hotels and other businesses operating in the entertainment sector. It may take years for these businesses to regain their footing.
Additionally, the demand for office space may be altered for years to come. Over the past several years, there has been a concerted effort to pack more people into a smaller space. Now, with social distancing guidelines and work-from-home policies, office buildings have become cavernous. Today, they resemble a morgue rather than a vibrant work environment. Expect companies to rethink their workspace.
Second, with revenues down significantly, both landlords and tenants are rethinking their lease options. Some tenants have stopped paying rent altogether and are relying on clauses in their contracts to abate rent. Such contract clauses such as Force Majeure, Material Adverse Change (MAC), and Frustration of Purpose provisions in leases are being used by tenants to stop paying rent. Even Purchase & Sale Agreements (PSAs) are being renegotiated between buyers and sellers.
Third, some businesses are flourishing due to increased demand for their products during times of crisis. Amazon, for instance, is doing a booming business. The distribution sector for industrial real estate seems to be thriving. And with America discovering that 95% of its medicines are produced in China and other foreign markets, it appears there will be forthcoming incentives to bring medical manufacturing back home. Further, interest rates have been dropping which gives property owners a chance to refinance at lower rates.
What will the future look like for the commercial real estate industry? As we move through the five stages of fear this pandemic has caused, i.e., panic, avoidance, struggle, coping and actualization, there will be both losers and winners in commercial real estate. The entertainment sector will eventually regain its footing because consumers are tired of staying at home and cooking their own meals. The office sector will adjust to changes in the workplace, which will create opportunities for investors. The industrial and medical sectors will flourish.
In short, this is a time of uncertainty that will take time to sort out. Real estate investors and practitioners should look for opportunities to enhance their portfolios by picking up commercial properties at below market prices. Eventually, the commercial real estate market will adjust to the new normal.
ABOUT THE AUTHOR
Ken has been in the real estate business for over 40 years and has personally overseen the development and management of over $350 million worth of assets. Ken holds a B.S. degree in Accounting from Brigham Young University, a MBA from the University of Utah. Licensed real estate broker since 1976. He holds the following designations: CCIM, CPM, CRS,CCA. Served as the president of the Utah Apartment Association.