In recent years Commercial Real Estate (CRE) has grown in interest as an asset class. Much like residential real estate, CRE historically has been a necessary commodity for businesses of every type and size to operate. The ongoing crisis surrounding the pandemic challenges that assumption. Many businesses and employees adjusted rapidly to working remotely, and questions abound as to whether this is the “new normal”. Of course, this may have some far reaching implications for commercial real estate and the long term impacts are difficult to predict. However, with the year coming to a close we can start to make some definitive statements about the impacts on coronavirus over the past year on CRE.
The first clear trend in CRE is that not all CRE was impacted by the coronavirus equally, but all were impacted negatively in some way shape or form. Office spaces look like they will be taking more of a long term hit than a short term presently–most employers have been able to sustain rent even while employees work remotely. Facebook and Amazon just purchased property in New York City this year for office space even as they both push for more hybrid working models. Still, office space will suffer a net loss of 95 million square feet of real estate between q2 of 2020 and q3 of 2021. It will probably not be till 2025 that the office space market fully recovers, and even this is mildly risky. A major trend in young employees this year was traveling while working, and the digital nomad lifestyle has some gravity to it. Further, only 14% of employees believe their employer will provide a safe work environment. With that lack of trust, it will be fascinating to see how workers respond to mass requests to return to the office.
However, office spaces look superb when compared to retail and hospitality locations. If brick and mortar retail was struggling to compete with online competitors before, the problem is all the more exacerbated. An unsettling example: GAP was sued by Simon Property Group (the largest leaser of retail mall spaces in the country) for $66 million in unpaid rent for the months of April, May, and June. The inability to make rent for retail spaces is easily the primary reason for concern in the CRE. Ultimately the banking system will heavily determine the outcome of the retail rent crises. Banks as of now have $2.38 trillion dollars invested in CRE loans. More and more companies struggle to produce money for rent, and banks have started making concessions in response with payment deferrals and waving of late fees. How a stimulus package might play into the situation remains indeterminate while congress continues to spin its wheels.
There is no doubt that commercial real estate has taken a hit. While the news focuses on the owners of businesses hit by the pandemic, there could be a more dangerous pitfall lurking behind those owners–the people who lease spaces out to small business owners. Projecting the future is murky at best, but hindsight should be 20/20. Clearly, this past year impacted the commercial real estate market negatively, and could shake up how commercial real estate is valued moving forward.