It seems that no matter who you are talking with right now, everyone wants to know the same thing. How is the current pandemic going to affect real estate values and lease rates, in both the short and the long term? I would expect this from clients and colleagues, but I even have friends and family asking me the same question. It has become increasingly evident just how much commercial real estate is intertwined with the overall economy.
First, let me dispel any misconception that prices are going down because of the current economic turmoil. I have had many prospects presume there must be some good deals out there because the stock market is falling. I’m here to say that simply is not the case. The commercial real estate market does not react overnight, it is a much slower cycle. This is not to say that everything is status quo. Landlords are getting creative with offering incentives such as free rent to tenants to lock in the long term. Yet the two biggest factors that will impact pricing long term is supply vs demand and availability of financing.
Many are comparing the pandemic to the 2008-10 recession, but in the recession, demand dropped off significantly and lenders were not making loans. It is too soon to tell if either of those will occur this time around. Demand will vary by market segment, which I will get into further, but the early indication is that the low-interest rates and availability of funds will help drive the recovery.
There is no doubt the hardest hit segment of the market will be retail. Many small businesses will not be able to withstand extended closures, and many large retailers will consolidate locations and continue to shift their focus to e-commerce. Even this won’t immediately impact lease rates, though. The old rule of thumb for real estate is location, location, location. I believe we will see some retailers, restaurants specifically, upgrade their locations. This will keep lease rates propped up in the more attractive locations, but cause an adverse trickle-down effect on the less desirable locations. Restaurants may also need to increase their footprint to accommodate the optimal number of guests for profitability.
Meanwhile, the industrial market will continue to remain as strong as the main benefactor of the e-commerce trend. The need for distribution hubs closer to the end-user is important now more than ever. Supply chain and logistics will continue to evolve as experts study the effects of the pandemic, but overall I don’t see much change in the industrial rates.
The office sector may be one of the hardest ones to predict. Depending on who you ask, you can’t tell which way the wind is blowing. For every person who enjoys working at home, there is another who can’t wait to get back to the office. Employers will have a timely sample size to study as it relates to productivity. I have a feeling it will vary both by the industry as well as on a department-by-department basis. Furthermore, any potential size reduction in on-site personal will likely be offset by any physical distancing of individuals who work in close quarters. Once this is all taken into account, I believe the office market will remain unchanged.
Hospitality has taken a harder hit than retail in the short term, but once the travel restrictions are lifted should bounce back over time. Looking back at 9/11, the travel industry was not nearly as affected long term as many predicted. That said, I could see a focus on antimicrobial surfaces and biometric screening being implemented in the future. Finally, once everything normalizes, the multi-family market should continue to keep pace with local demand drivers, such as population and employment growth.
All in all, while the world may look a little different coming out of this, commercial real estate will continue to remain an integral part of the economy.