The pandemic has thrown a wrench in commercial real estate investors’ plans and may have scared off new investors of both residential and commercial real estate. Almost overnight, retail and office spaces were void of people, and businesses were struggling to pivot to online sales. Although many businesses have closed their doors, others have weathered the storm, and almost half of all workers are experiencing burnout — investors are looking toward what’s next for the future of commercial real estate.
As always, investors are looking for good cash flow, high cap rates, and tenants with the ability to pay rent on time. Here’s what you need to know about the future of commercial real estate in a post-pandemic world.
1. Recovery will take time
The only thing we can say with nearly 100% certainty is that commercial real estate will take some time to recover. Just as the U.S. and global response to the pandemic has taken careful planning, policy and adaptation, the commercial real estate industry will experience the same. Stimulus checks and small business loans from the government have kept businesses afloat over the past year, but those policies will wane in the coming months, and the market will adjust accordingly.
2. Not all spaces are created equal
It’s unfair to lump all sectors of commercial real estate together when talking about the effects of the pandemic and life after it. Some industries — like office space and concert venues — may be slower to recover. Others — like industrial complexes or multi-family units — may see a quicker uptick.
3. Not all markets are created equal
Not all markets are the same, either. Rural communities have less commercial space in general, and thus, its market has been less devastated by social distancing guidelines and shutdowns. This means rural markets have less catching up to do. Urban areas are often centered around commercial space and will take longer to bounce back from the pandemic — and may do so in a different way.
4. We are experiencing a new economy
The pandemic has quickly brought about new habits and ways of life for Americans — this includes everything from work and school to shopping and socializing. And although parts will rebound once we’re in the clear from COVID-19, many of our pandemic routines will stick. In essence, we’ll keep one foot in pandemic times and the other in pre- and post-pandemic times.
5. There are fewer choices and rising demand
The social sectors — such as restaurants, retails spaces, and nightclubs — have suffered greatly during the pandemic. Despite government assistance, many businesses have had to shutter their doors. As we slowly regain the ability to gather in groups and venture out, there will be fewer options for where to do so. But we can anticipate rising demand by consumers antsy to do all the things they couldn’t over the past 12 months. This may be good news for those businesses that managed to survive.
6. Access to capital will be rare
Some real estate investors will sell off some of their portfolio in favor of other forms of investing after months of tenants struggling to pay rent. But, while these properties may be easy for investors to come by, access to capital may not be. Commercial real estate investors are typically leveraged 70% to 85% in their properties, and with their tenants taking a hit this year, many are short on cash.
7. Airtight business plans will be key to securing a lease
Commercial investors used to be quite lenient about a potential tenant’s business plan. In the post-pandemic era, we’ll begin to see commercial landlords tightening their requirements. Business owners will need to prove they have a viable business capable of generating enough net income to cover its bills, including rent.
8. Online shopping is here to stay
The future of retail is the most shaky. Even before COVID-19 came onto the scene, consumers were trending toward replacing in-person retail with online shopping — at least for things like clothing, electronics, and general household goods. Social distancing, reduced shopping hours and the avoidance of large groups will only accelerate this trend. Brick-and-mortar stores will be best served by adapting to the online space — perhaps by reducing their physical footprint and investing more in digital platforms.
9. Retail spaces with outdoor options will be desirable
Although there will still be a place for retail spaces, those with amenities such as outdoor patio space, good ventilation systems, and ample square footage will be most desirable. Although restrictions and mandates will eventually loosen, avoidance of small, enclosed space and large groups will remain embedded in consumers’ minds for years to come.
10. Urban dwellers are craving a social life
Those living in urban areas do so because they love the social scenes and the nightlife. Pent-up urbanites will likely resume their pre-pandemic social activities and may even take advantage of it more.
11. Travel will ramp up
Just like urbanites resuming their beloved social activities, inevitably, travelers will resume their flights, hotel or short-term rentals, and exploration. We’ve seen evidence of this already with more travelers booking with airlines and the hospitality industry seeing a slow resurgence.
12. Investors should (as always) diversify
As is true in any market, real estate investors should diversify, not just within investment areas but also within the commercial space itself. As the pandemic has shown, an unanticipated circumstance can completely throw off even the most well-planned investment portfolio.
13. Office space will remain
Despite many Americans working from home during the pandemic, office space may not take the full plunge many had speculated. Twenty-nine percent of remote workers say they won’t return to the office, even after the pandemic. Sixty-three percent of employees say they prefer working remotely over working in a traditional office space.
Many experts, however, say working from home reduces collaboration, and companies such as Google will limit remote work going forward. We will likely see workers return in-person, at least in a part-time capacity. While this may result in businesses needing a smaller footprint for their employees, office space will likely be here to stay — with increased ventilation, more private offices and ample outside space, of course. Plus, there will be repurposed spaces for coworking and entrepreneurial purposes.
14. Commercial footprints will be smaller
Just like office space, many other industries will be reducing their physical footprint, including retail, banking, etc. Some consumers will still prefer to visit in-person on occasion, but our adoption of technology and online solutions will likely stick around.
15. Commercial real estate systems will need to digitize and automate
In order to keep up with this digitization, commercial real estate systems will need to continue to evolve and automate. Both consumers and commercial tenants will expect it. Although they won’t need to avoid in-person tours and lease signings after COVID-19 numbers are reduced, many tenants have realized how much time can be saved through emailed leases and virtual tours.
16. Industrial and logistics sectors will recover more quickly
The pandemic has caused a shortage of items beyond toilet paper. With shutdowns, social distancing, and infected workers causing a slowdown of manufacturing both in the U.S. and globally, items such as cars, bicycles, RVs, coffee, lumber, and even homes themselves are in short supply but high demand.
Industrial and manufacturing sectors are looking to play catch-up from lost production time, and many of these items will see even higher demand as people begin to move around more. Investors may consider purchasing industrial real estate as these companies look to expand their physical space both for social distancing as well as increasing outputs.
17. Multi-family sector will remain
People will always need somewhere to live, and the financial strain the pandemic has thrown at lower- and middle-income earners will leave many still renting even if they’d prefer to buy — especially in today’s hot seller's market. However, investors may see a shift of less demand in urban communities and an increase in less populous suburbs for multi-family housing.
Bottom Line: Pivot and Diversify
If you’re currently investing in commercial real estate, you know that adapting to change is key — and more important than ever. And the future of commercial real estate isn’t nearly as dire as once thought. Invest in the right types of properties using the right tools and websites, manage your risk, and diversify your portfolio, and you’ll continue to grow your wealth.