How COVID-19 is Affecting Commercial Real Estate

"The question is not whether we will recover, only how quickly."

It’s no secret that the coronavirus has negatively impacted second-quarter leasing, sales, and investment activity, but it has been a slowdown rather than a full stop. While retail, restaurants, and hospitality are struggling, grocery stores and vice delivery are seeing huge surges in business. 

As more and more companies announce layoffs and headcount reduction, office space will start to flood the market. The experiential amenities that were previously so important, like cafeterias and fitness centers, may need to be reconsidered or redesigned if the pandemic cannot be controlled.

Retail was struggling to compete with e-commerce already, and the new threat of shoppers staying home will be the death knell for many small stores. Expansion for the larger chains will slow down or stop until the crisis is over. 

Industrial real estate will vary by sector; logistics and shipping are in high demand, but as stores stop needing products to sell, the factories that produce them may be in trouble. Quick pivots and adaptation will be key to success. Global supply chain disruption will delay manufactured goods from China, which may leave shipping warehouses briefly empty. 

Multifamily sales and leasing are continuing at different paces depending on the geographic market and class of building. We’re seeing increased consolidation in leasing, particularly with B- and C-class assets (people that likely had less savings and are moving in with relatives as they can’t make rent). Most transactional deals that are closing were already far into the process. Stories abound of buyers walking from many millions of dollars in deposits such as the recent high-profile story of Uptown Station in Oakland that was in contract with a $20 million non-refundable deposit. Until some stability returns, there will be challenges, particularly for operators of properties such as hotels and B or worse small retail. Calculating the pricing discount and how to hedge risks remains a huge question mark. There is limited capital for certain categories of new opportunities, and third-party due diligence is fraught with difficulties for many properties.

Developers need a relatively high degree of certainty and predictability the projects will succeed. Existing projects underway are continuing to move forward toward completion, but new projects are largely on hold until the situation stabilizes and lenders become more comfortable with the risk levels. This could result in a wave of new developments after the pandemic is controlled, as projects that were in the pipeline are finally able to move forward. Timing will be key, if construction supplies imported from other countries are delayed from arriving before the weather turns and construction pauses for the winter.

That said, there are silver linings. A drop in construction prices would enable deals to move forward that hadn’t made financial sense before. Distressed properties and revalued assets will create opportunities for investors with the capital and latent risk appetite, which could drive recovery fairly quickly. San Francisco may look at pulling back the heavy development fees that are a burden on the industry, or offer tax relief. Companies that are downsizing will need new, smaller spaces, with a cascade effect, and companies that are keeping their current headcount in the office will need more space to allow for social distancing. Landlord/tenant relationships are deepening as they work together to find solutions, which may lead to higher retention rates. 

The question is not whether we will recover, only how quickly. 

Sources: NAI Global Newslink, Globe Street, CAPRE’s Commercial Real Estate Daily: An Action Plan for Northern California in Uncertain Times webinar