Every industry segment of society has been impacted by the COVID-19 pandemic, including the real estate market. Retail closures resulted in millions of employee furloughs, and stay-at-home mandates forced millions of employees out of their offices to work remotely. While many shopping centers, malls, individual retailers and offices have since opened, they have done so slowly and not at full capacity. In fact, many businesses are keeping their employees working from home, either to brace for the second wave of coronavirus or to take the time to reassess the need for large office space.
Inside the Commercial Real Estate Market
Due to government-imposed closures, many businesses have experienced, and continue to see, a sharp decline in cash inflows, especially in the retail and hotel sectors. Tenants and landlords have been proactively negotiating rental payments, with many retail tenants having served force majeure notices to their landlords, indicating their inability to pay rent as a result of unforeseen circumstances and mandated closures. Commercial property owners and managers are facing drastically reduced operating income even with the reopening of businesses, and are nervous about how many tenants will struggle to make their lease payments, particularly in office spaces that are still unoccupied for the most part.
Additionally, developers during the shutdown were unable to obtain permits for new projects and have faced construction delays, stoppages, and potentially shrinking rates of return.
The multi-family market has been impacted by massive employee layoffs and furloughs due to business closures, with residents having difficulty making rent. This affects multi-family properties’ rental revenue, operating metrics, and overall valuation. It’s expected that average apartment rents will see declines moving forward. A recent article in CNN cited statistics indicating rental prices have lowered in many places across the U.S. In May, according to apartment listing platform Zumper, the top four most expensive cities – San Francisco, New York, Boston, and San Jose – all saw median rents on one-bedroom apartments decline from a year ago, as professionals left the cities. Additionally, higher-end and luxury units have been the hardest hit so far with 10% to 20% rent decreases, depending on where they are located. As more apartments become available, owners have been forced to reduce their rent to increase interest, according to the CNN article.
The construction slowdown and halting of new residential developments, including those for condo communities during the three-month lockdown has, for the most part, impacted developers’ project timelines and cash flows. A survey of contractors performed at the end of April, according to Deloitte, revealed that more than one-half of U.S. construction firm respondents halted or suspended projects, and more than two-thirds experienced delays due to a shortage of materials and personal protective equipment. Moreover, active project sites today must adhere to social distancing guidelines and frequent cleansing of common areas and construction equipment, causing ongoing delays.
The Silver Lining: Warehouses
While large property investors have shown a small appetite for offices, apartments, and retail space since the pandemic began, the demand for warehouses is still high, according to a recent article in the Wall Street Journal (WSJ). That’s because e-commerce, which depends on industrial real estate, hasn’t been as affected by the pandemic as other types of properties have. Everyone has been buying stuff online. In fact, the surge in online purchases during the last three months or so has had some online retailers struggling to keep up with the demand, leading to delays and potentially to more demand for warehouses where goods can be stored and processed, cites the WSJ article.
Potential Changes to Come
A report by McKinsey sees real estate owners and operators across almost every asset class having to consider several potential longer-term effects of the coronavirus outbreak and making substantial changes. Within the commercial office space, for example, the multi-year trend toward densification and open-plan layouts may reverse sharply. Public-health officials may increasingly amend building codes to limit the risk of future pandemics, potentially affecting standards for HVAC, square footage per person, and amount of enclosed space, says the McKinsey report.
Businesses will be questioning whether they need smaller office space now. In addition, if a large percentage of a business’ work force can efficiently work from home, do they even need private workspaces for all employees? Do they need a big break room? How important are building amenities, such as on-site showers, locker rooms, and on-site coffee shops? These are all issues that will be rethought and reimagined.
The moratorium on business travel could have a lasting impact when alternatives such as video conferences have proved effective or even preferable to in-person events, affecting the hospitality sector where many face-to-face business conferences and meetings traditionally took place.
When seeking an apartment rental, people will be looking for properties that have more home office space, outdoor space, and in-unit washers and dryers.
These and other changes are still unfolding as the fallout from COVID-19 becomes more evident. Distinguished will continue to monitor the real estate industry and potential changes in the various sectors.