COVID-19 has upended the world and commercial real estate has not been immune from the effects. As offices, hotels, restaurants, and many retail stores and malls sat empty — and activity in warehouses escalated in response to the surge in e-commerce — COVID-19 radically altered the industry's long-term expectations.

Here are some significant effects that are likely to linger, and how they could transform commercial real estate.

  1. White-Collar Business Trends
    Many companies have found themselves operating in unprecedented ways to continue conducting business. For example, businesses that had been resistant to remote work were forced to turn to it. Those that have done so successfully may pivot to a smaller on-site workforce in the long run, reducing their need for pricey office space.

    The layout of office space likely will change, too. For starters, the trend toward open-space floor plans could come to an abrupt halt due to fears related to the spreading of contagion. Municipalities might introduce new standards for square footage per person, as well as the amount of enclosed space and HVAC. Air filters already commonplace in health care settings could be incorporated into office buildings. The change in business practices also could have repercussions for the hospitality sector. With business travel largely restricted, companies may have discovered that videoconferencing can be as effective as in-person meetings. And international travel might fall off if businesses increase their reliance on domestic supply chains (which could boost demand for warehouse and manufacturing space).
  2. The Retail Shift
    The threat of e-commerce on brick-and-mortar retailers is not a new topic, but the pandemic may have accelerated the discussion. Stay-at-home orders prompted many people to shop online for items they had not previously, such as groceries, and many are expected to retain the habit.

    It is not all bad news. While the demand for physical stores continues to drop, the demand for the data centers that power online shopping and "last-mile" warehouses that facilitate quick delivery could grow. Some investors are already eyeing distressed properties, like big-box stores, that can be converted to industrial use.
  3. Safety and Health Concerns
    The COVID-19 crisis has validated the fears of germophobes. Regardless of the property type, many tenants and buyers will have safety and health at the front of their minds. They will expect regular deep cleaning and sanitizing practices and the ability to "social distance" from others.

    Touch-free technologies — such as voice-activated elevator buttons, automated bathroom doors and motion sensors for faucets, soap and paper towel dispensers — are in the spotlight. Increased sensitivity to surfaces as potential carriers of germs also might drive a preference for spaces equipped with tools to move content from individuals' personal devices to big screens viewable by more people without needing to touch wires or connectors. Designers may begin to employ antimicrobial materials more often for hardware and minimize tough-to-access (and therefore clean) corners or other places where pathogens can collect. Designers, urban planners and the like also need to keep in mind what could be a lasting aversion to "densification," the dense occupation of space that had been growing in popularity in some areas.
  4. Tenant Negotiations
    Tenants experiencing financial difficulties are looking to their landlords for lease concessions or rent abatements. It may be tempting to institute sweeping policies that apply to all tenants (no concessions for anyone or a 10% abatement for everyone). The smarter strategy is to make decisions on a case-by-case basis.

    Landlord decisions should not always be ad hoc, though. Landlords need to develop a decision-making protocol that factors in the tenant's long-term prospects, renewal probability, default probability and building occupancy rate.

Do not wait

Owners, operators and developers cannot afford to take a wait-and-see approach to the coming changes for commercial real estate. Take action now to position yourself to thrive in the new landscape.

Originally published by Ostrow, August 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.