In the last nine months, many people have had their world turned upside down, both financially and emotionally. The global pandemic we now find ourselves in has disrupted many parts of our lives, including the real estate industry. Many Americans have physically uprooted themselves, fleeing cities, and seeking more suburban living. With the ever-changing nature of the pandemic, where does that leave commercial real estate?
At the beginning of the pandemic, many employers sent their employees to work from home indefinitely. While some employees have returned to working in the office, many employees will be working remotely into 2021. The trend of working remotely could further transform office real estate sales. A recent article written by Korey Matthews for CNBC states that “a net 215 million square feet of office vacancy will be lost due to the pandemic”. The pandemic has arguably proven that employees can effectively work from home, allowing for a richer work-life balance. However, there are a handful of jobs that need to be done in an office setting. Companies such as Amazon and Facebook are purchasing large office spaces to allow for a more spread-out work environment. Office real estate is expected to recover; however, the timeline for that recovery is not clear.
Retail real estate is another submarket impacted by financial burdens during the pandemic. Retail landlords are reporting higher rates of unpaid rent than other commercial property landlords. According to an article from the Commercial Real Estate Development Association, “retail is under-performing at around 20%-40%”. This is predominantly due to many states shutting down non-essential businesses during the pandemic. The shift towards online retail was already reducing the demand for in-person shopping, and the pandemic has just increased it. As stores reopened shopping malls are seeing less foot traffic. Businesses that depend on in-person customers, such as restaurants and gyms, are seeing a shift to curbside takeout pickup and online fitness programs. However, this is not permanent. Experiential businesses will bounce back, but the rate at which they will do so is unclear.
It is important to invest in assets that will thrive post-pandemic and create the most value such as multifamily properties. Multifamily real estate is staying afloat because the need for shelter is inelastic. Regardless of the economic circumstances, many people will prioritize rent in order to ensure they have a safe place to live. As a result, multifamily real estate tends to be the most resilient sector of investment real estate during an economic crisis. Many people are migrating out of bigger cities and into secondary locations. According to an article written by Ari Rastegar for the National Real Estate Investor, “While many investors wait on the sidelines, now is the time to be aggressive in buying vintage multifamily property. There’s going to be a significant shift towards these garden-style communities as they offer more opportunities for social distancing with open space, lower density, and outdoor access, as well as greater air circulation compared to high-rises with closed hallways and elevators”. The rent for this type of multifamily property is usually on the lower end, which is crucial during this pandemic. The AZ Big Media states, “Primary markets will not suffer forever, but their recovery will depend on how much newly relocated individuals enjoy their adopted homes and cities and whether they choose to stay”. The key to success is to find properties with more space for social distancing and low monthly rent.
Warehouse real estate is also doing well during the pandemic. As many companies continue to evolve online, more space is needed for their products. As the pandemic continues, we will see household consolidation. College students are returning home, families are downsizing, and people need a place to store their belongings. Projects that were underway or in the planning stages have stalled right now, which will also boost the self-storage real estate sector.
Each segment of the investment real estate sector has its unique challenges. All of the investment real estate sectors will face obstacles during the recovery process, and some may experience great change due to new behaviors adopted during the pandemic. Since there is no clear timeline of when the pandemic will end, it is hard to say what the comeback will look like for each segment of the investment real estate industry.