The Future of Commercial Real Estate Post-Pandemic

While a recession was predicted, the pandemic certainly accelerated the effects and impacted certain sections of the job market. Consequently, the world has gone into a recession from which it will make a V shaped recovery.

Residential real estate is not hit too adversely as its non-optional and people were successful at maintaining it.Commercial real estate on the other hand, one of the top expenditure overheads for a company, has lost its purpose with globally workforce going fully remote. Residential real estate continues to get stronger, but working from home and implementing hybrid schedules post-pandemic could significantly adversely affect the commercial real estate market for decades. 

Nearly 100,000 American businesses have closed since the beginning of the pandemic, creating many vacant offices and storefronts. As people begin returning to work, chances are they will be going into an office less often. And most of these jobs will be permanent work-from-home jobs in the future. In states where industries like manufacturing are the predominant industries, many jobs cannot be performed from your kitchen table at home.

Many experts believe the traditional office’s popularity has already passed its peak. Financial pressures are increasingly driving companies to seek smaller, more flexible and cheaper offices. We are already seeing a decreasing number of businesses that are using the traditional office model and reducing the amount of space leased per worker. According to recent research, 54% of employees worldwide now spend half the week working somewhere other than their company’s central office locations.

Now, as vaccine distribution surges, we are hopefully on the verge of being able to return to pre-pandemic routines. It begs the question: Will people want to go back to the old normal in its entirety? At the start of the pandemic, there was a consensus that everyone working at home would want to continue doing so. But as the months wore on, the basic human need for social interaction made itself felt, and many workers are now anxious to return to the workplace in some capacity.

It is a logical time to consider what has really, truly changed for the long-term versus what has stayed the same.

What Changed in 2020?

Talent 

Post-pandemic employees expect more autonomy and employers are responding by offering choice in an attempt to gain a competitive edge in the race for talent. Research finds that 67% of employees desire a balance of in-person office time and remote working as their preferred work style and only 28% of employees desire a fully remote arrangement.  Despite so much focus on remote work during the pandemic, future real estate strategies likely will not favor fully remote or fully at the office. While this will result in lower utilization of the office on a regular basis, it will not mean an end to the office.

Location

Emerging migration patterns, population density, regulations surrounding public transportation and a hybrid office structure have begun to impact location selection criteria. Decentralized office strategies are emerging as a tool to support existing employees and attract new ones.

Sentiment toward high-density urban cores remains favorable in the long term, but employee choice over when and where they work will continue in the wake of COVID.  Flexible office providers are capitalizing on this emerging trend by more easily providing cost-effective, on-demand space. Many businesses are likely to choose areas that offer the perfect confluence of market attributes, talent location and availability, mobility profile, real estate availability and sustained mass transportation barriers.

Online Shopping

More consumers than ever are enjoying the convenience of online shopping.While some people will still prefer to browse sales racks in person again, the way we shop will undoubtedly never be the same and this will have massive implications for commercial real estate. Investors and lenders alike are likely to place more value on not only shopping centers that attract experiential tenants, but also brick-and-mortar locations that offer drive-throughs and convenient curbside pick-up locations. Meanwhile, the e-commerce supply chain presents significant opportunities. 

Lenders and Investors Now Have More Patience

The pandemic-induced shutdowns of restaurants, shops, travel, offices and entertainment venues cast ripple effects throughout the economy. Many borrowers struggled to make mortgage payments. But rental assistance and other government relief programs helped keep cash flowing for many property owners so we have not yet seen a massive wave of distressed properties hit the market.Additionally, many lenders have restructured the way they do business, instead choosing to work with cooperative borrowers by modifying loan terms rather than jumping too quickly to foreclose. This marks a distinct shift from the way lenders reacted during the global financial crisis and may be one enduring lesson from that period.

What Stayed the Same?

People Still Want to Gather In Person

Nine months of social distancing proved that human beings are social creatures who crave in-person interaction. While it is true that many people will work from home more often, business travel will be cut back and families are fleeing big cities in search of more space in suburban areas, that does not mean that the office is dead or that cities will never be the same. There is still a place for offices, physical retail and hospitality post-pandemic.Cities will eventually bounce back because people still crave the bustling lifestyle that urban centers offer.

 Good Quality Real Estate is Still Important

A good deal is all about timing, and the pandemic has not changed that. As we look to the future, lenders will be paying more attention to healthy building features, such as interior courtyards that offer outdoor gathering space. They also want to see diverse tenancy with staggered lease expirations, which will help buildings maintain steady occupancy over time. Additionally, lenders are considering the transformational potential of the property (and borrower) to adapt to new trends, such as whether a retail storefront could make a good office sharing location.

Top 5 Predictions for Post-Pandemic Real Estate

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Buyers Will Upsize

Micro-apartments were beginning to trend pre-pandemic, but city dwellers that have been confined to small living spaces will likely be looking to spread out. Larger apartments will come back into style and many will be looking to size up in square footage, acreage light, outdoor space, view, and other amenities. This will add opportunities in rural and suburban areas where there were none two years ago. 

Outdoor Space and Home Offices Will Become a Hot Commodity

Balconies, terraces and private roof decks have always been prized amenities for prospective buyers, but they will become even more in demand in the coming months. Being stuck inside made many people realize what is important to them in a home and in their space. Outdoor space may become more important and home office space will also become a more standard offering. This means that multi-family projects that are currently in the planning stages will have developers reconsidering layouts to accommodate tenants working from home.  

Boutiques Will Win Out Over Larger Developments

While the pandemic has promoted some to wonder whether the trend toward urban living will ebb, we do not think that will stop people from investing in real estate in large metropolitan areas. Boutique buildings will likely win out over large developments and townhouses will become more prized. 

Construction Prices Will Continue to Rise

Before the pandemic, the construction industry was already facing a shortage of skilled workers, with many professionals leaving during the Great Recession and construction booming across the country. When the moratorium on construction ends and builders are ready to get back to work, we can expect delays in the permitting process and increased costs as the supply chain slowly recovers and superintendents get up to speed on how to keep workers safe. There will also be the challenge of new constraints on construction lending and the slowdown of land acquisitions following a likely recession. 

The Supply Chain Will Shift

More than 30 percent of construction materials come from overseas; from countries such as China, Italy and India, which are facing their own challenges withCOVID-19. Many of those suppliers are going to build back up but it is going to take years.

How Evanco Can Help You with Your Legal Form Needs

No matter the type of property you own, you can count on the experts at Evanco Realty Advisors for the very best in full-service commercial administration. We provide everything you need to minimize your ownership workload and maximize the return on investment for each of your commercial properties. We provide peace of mind to owners; implement excellent property management services that enhance value for landlords.

Call us today at (619)814-1688 to see how our commercial property management strategies can help you!

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