The COVID-19 pandemic will perpetually clout almost all aspects of our lives; this includes the use of commercial real estate. However, from the black plague to the discovery of penicillin, one thing is clear: there is generally an expansion not only in economic terms but also in technology and innovation. Indeed, the post-pandemic recovery has the potential to accelerate and improve with a focus on social justice, health, remote work, households, workers, and companies. And while the pandemic has negatively affected all classes of commercial real estate, it has also brought about innovative possibilities for Commercial Real Estate, such as affordable rental prices, dynamic online communications, and sending in forms and payments through online platforms. Hence, the future is not all gloom for the commercial real estate market, even in light of the COVID-19 pandemic.
Commercial real estate will slowly start to recover from the effects of the pandemic. However, due to the lingering effects of the pandemic, this recovery will most certainly have its challenges and setbacks along the way. That being said, the following are commercial trends that could rebound in 2021 and onwards:
1. Asset Class Winners – While retail, hotel, and office prices continually decline in value ranging between five (5) to ten (10) percent, industrial, data center, life science, and single-family homes will continue to have their value increased. Moreover, the volume of transactions in favorable sectors will most likely remain lower than usual, which will support higher pricing due to increased investor competition.
2. Interest Rates will remain low in 2021 – The Federal Reserve will most likely accommodate a monetary policy, and hence, keep the interest rate low throughout the year. This action will consequentially provide a positive backdrop for commercial real estate borrowers and will inevitably impact the positive recovery of the economy.
3. Major Cities will most likely see population decline – Studies show that New York City, Chicago, San Francisco, Los Angeles, and other cities will continue to lose population. Even before the pandemic hit, people in big cities with rents far exceeding the earning capacity of Americans in the middle class have and will continue to decline. Work-from-home policies and public health shutdowns even further accelerated the decline of the population of these large metros. People are looking for cities that offer a better lifestyle, lower cost of living, and better weather. Some growth cities include Austin, TX, Mount Pleasant, SC, etc.
4. There will be a mainstream rise of alternative assets – Commercial Real Estate exposure will increase among asset allocators, and this is because it offers resilience in an imbalanced recovery. In this case, high equity valuations and negative yields from many government bonds are expected to push more investors toward alternative assets, the commercial real property.
5. Work-from-home offers more opportunities for alternative use of office space – Due to the global pandemic, lockdowns have led more companies to have their employees working from home. At first glance, it may seem like office space would prove useless in 2021, there are several opportunities in the Commercial Real Estate market for commercial offices. Vacancies in high-traffic areas make this the perfect time for commercial owners who are looking to expand.
Therefore, based on the preceding predictions, the pandemic offered a silver lining amidst its adverse effects. It is allowing the slow but dominant increase of commercial real estate in the market. Lawrence Yun of the National Association of REALTORS®’ chief economist said that personal income is up 10.7% year over year, and personal savings is up an astonishing 302% for the same period. As a result, considerable capital will most likely be pumped into the economy, with consumers eager to tap into a year’s worth of savings and what remains of their stimulus funds. According to Yun, “If we look at potential, it’s even greater than we could have expected”. This is, in essence, ‘revenge spending’ wherein people tend to spend what they have saved due to pent-up frustrations due to being stuck at home, saving up money, and now they can go out again. This is, of course, great news for the Commercial Real Estate sector. People will most certainly want to spend their savings on properties whose value has been reduced due to the effects of the pandemic. This is coupled with the interest rate these investors would pay for commercial real estate, which will be relatively lower than previous years. All of these incentives would most certainly be enticing to people who would want to spend their saved-up money – which ultimately would have a remarkable effect on the real estate market.
Another area of potential benefit to commercial real estate is office vacancies. As previously mentioned, offices have been left empty or, in some instances, only a handful of employees are working in offices. In addition, studies show that there has been a decline in the physical office setting or that more commercial offices are engaging in smaller spaces for lease at a much shorter period. Work-from-home will be the single most prominent question for commercial real estate coming out of COVID-19 since this forces companies to re-evaluate their use of office space. Hence, there is a lot of potential in the office, predicting a rebound in the sector after a period of experimentation. Companies will try out different ways to organize office space and employees. However, industrial warehouses and land remain bright spots for commercial real estate investing, increasing 2% and 3% respectively in sales volume year-over-year in the first quarter of 2021. In fact, funds have been invested in the relatively new digital real estate sector, including cell towers, data centers, and logistics facilities, which have performed exceptionally well. These are offshoots and, ultimately, form part of commercial real estate.
To summarize, there is still potential in the office sector; with interest rates near zero, unemployment rates dropping, vaccinations increasing, and the potential for infrastructure investments on the way, the future is still bright for Commercial Real Estate. Although this economic potential is dependent on many factors, virus-related included, there are opportunities ahead for commercial real estate investors along with signs that the Commercial Real Estate market can make a rebound in 2021.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
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