Jan 23, 2021

Impact of Coronavirus on Commercial Real Estate

It will likely take years to understand the true impact the coronavirus pandemic had on Americans, from the educational development of kids to unemployment rates and family planning. 

However, some industries have already experienced notable changes with trends that are unlikely to be reversed once the vaccine roll-out is complete. The commercial real estate industry is one of them. 

Commercial real estate was negatively affected this year in various ways as employers and employees looked to weather the storm from COVID-19. Here are a few reasons why commercial properties struggled and why the industry may take years to rebound.

Businesses of All Shapes and Sizes Closed

When business owners closed their doors to enter government-mandated lockdowns in spring 2020, they were worried about a multi-week shutdown and having enough cash flow to pay the bills. However, some businesses (like night clubs and concert venues) have remained closed for most of the year or have opened in a limited capacity.

Many of these closures are permanent. According to Yelp’s Local Economic Impact Report, nearly 60% of businesses that closed in 2020 aren’t going to reopen again, which will have a major impact on commercial real estate. 

Vacant properties are less likely to fill up quickly, creating empty lots in towns and cities across the country. Increased supply will also drive down rental rates as landlords try to fill spaces with whoever is willing—even if it’s well below what they’re used to.

Even as America enters 2021, the worst isn’t over. The experts from CBRE Group Inc. told Bloomberg that commercial property values won’t bottom out and start to rise until the middle of this year—taking more than a year after that for a noticeable rebound. Many businesses continue to fight to stay open despite the pandemic, but we haven’t seen the last of the COVID-closures. 

Employers Sent Their Workers Home

Many employers sent their workers home at the start of the pandemic, thinking remote work would only last a few weeks. However, a variety of companies (including big names like Google and Twitter) have announced that teams can work remotely permanently moving forward. If businesses across the country follow suit—as they likely will—this shift will hurt commercial real estate.

A remote workforce means a smaller office space. If you have 10 team members but only need to make space for 4 who are in-house full-time, you can rent a much smaller office. In the next year or so, you can expect companies to look for smaller spaces to rent (with more hot-desking and meeting rooms) as they look to save money and make their operations more efficient. 

As developers look to build more commercial space, they may be more inclined to break up an office building into several smaller units instead of just 1 or 2 offices on each floor. 

The commercial impact on these changes could be huge. Bloomberg recently profiled Aby Rosen, owner of the Chrysler Building, who has worked to remodel the space despite the fact that it remains empty during the pandemic. Workers are content to give up their commutes, and executives are enjoying their time in the suburbs. The modern downtown office won’t return to what it once was. 

Customer Shopping Behavior Transitioned to Digital

Within the world of commercial real estate, the warehouse industry was thriving well before the pandemic. More brands are racing to keep up with Amazon’s order delivery abilities, which means keeping more warehouses across the country to become more agile in product delivery. The pandemic will only drive this demand forward as more brands invest in online ordering while customers transition to digital shopping.

The team at McKinsey and Co. highlighted how customers are using online shopping and why this trend is unlikely to reverse. Since COVID-19 started, 75% of consumers have tried a new shopping behavior. These behaviors range from buying online to curbside pickup. They looked for hands-off shopping experiences and viewed online ordering as safer than venturing out to a store. 

Customer shopping behavior graphSource: The great consumer shift: Ten charts that show how US shopping behavior is changing, McKinsey & Company.

 

This digital transformation accelerated existing growth in the online realm. Customers adopted digital shopping methods faster than projected, and many have enjoyed the new experiences. Commercial real estate firms will need to adapt to these new behaviors, offering more warehouse space for online orders and building retail locations with safety-centric features.

Prepare for Changes—Some Will Be Permanent

Ever since the first coronavirus cases spread across the country, Americans have pushed to eliminate the virus so everyone can return to normal life. However, the old normal is no more, and some industries and commercial real estate economies will be forever changed because of this. 

Consumers won’t stop shopping online, and employees want to keep working remotely. It’s up to developers to give businesses the brick-and-mortar solutions they need to these 2021 problems. 

About the author

Derek Miller
Derek Miller
Derek Miller is a writer specializing in entrepreneurship, small business, and digital marketing. His work has featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp. He’s currently the CMO of Smack Apparel, the content guru at Great.com, and a marketing consultant for small businesses.

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