COVID has accelerated reliance on technology and increased online shopping, which could continue to make warehouse space a valuable investment in 2021 and beyond.

COVID-19 has created a situation where consumers spend less time in brick and mortar retail shops. Not only does fear of getting sick accompany shopping in stores, but social distancing rules are increasing wait times at some retailers, making the process inconvenient.

This trend is boosting e-commerce, as consumers don’t want to deal with the risk and inconvenience of shopping at a store. Online shopping is becoming more popular in nearly every industry, even for essential goods like groceries.

From a commercial real estate standpoint, prolonged or permanent reliance on online shopping increases the demand for warehouses and fulfillment centers. Here’s a look at what the future could hold for e-commerce and the distribution spaces that make it possible:

The trend—which predates the pandemic—should continue

First things first: online shopping isn’t going anywhere. While the early post-pandemic days could lead to an influx of consumers heading back to the stores that they couldn’t visit for some time, these same people are learning the convenience of buying remotely.

In the early days of COVID, less than 30% of consumers were buying online, according to a survey by e-commerce website PYMNTS. By as early as May 23, that number increased to over 35%. 

This 5% increase is significant because most brick and mortar shops were closed at the beginning of the pandemic, but many had reopened by May 23. Despite having the option of heading out to buy their goods, more people were still shopping online.

This shift to e-commerce had been happening for some time, but COVID has accelerated the process. And it’s likely that consumers—including and notably less tech-savvy seniors—will continue shopping online because they’ve become more comfortable with the process.

More seniors using technology helps drive a durable e-commerce trend

Seniors are often considered slower to adopt technological advancements. However, COVID made it impossible for older members of society to continue living their lives the same way, leading to an increased reliance on smartphones and the internet.

Pew Research Center reports that about two-thirds of seniors aged 65 and older now use the internet, and about 42% of these individuals own a smartphone. Digging into the numbers further, 82% of people between the ages of 65 and 69 use the internet, and 59% of them have smartphones. 

These stats show that younger seniors are adopting technology at extremely high rates, which could further the popularity of online shopping. About ten million seniors are now buying on the internet

What online shopping means for CRE

The increase in online shopping rates is good news for many retailers, but it doesn’t stop there. As e-commerce becomes even more popular, additional stores will have to join the trend or risk losing their businesses. And both new and established e-commerce companies need warehouse space and distribution centers to meet the growing demand.

As a result, such spaces—already experiencing a boom—will likely remain a solid investment moving forward as more organizations look for these building types. Additionally, there could be an opportunity to repurpose empty spaces into warehouses. Many retail and office buildings are sitting empty, so converting them into fulfillment centers could turn a challenging situation into a beneficial one for investors. 

Evaluating the e-commerce distribution center opportunity

As with any investment, there’s a risk involved when assuming that warehouse space will be a smart play. And much of the inherent value of a distribution center relies on the current and potential make-up of the space and where it is positioned, including access to highways.

It’s worth getting expert advice as the situation unfolds, including a partner who will conduct intense due diligence on a candidate property. Speaking with a professional can help ensure your space is what these retailers and their partners are looking for in distribution centers.

Morris Southeast Group is here to help as you make the most of your current and possible commercial real estate investments. We will assist as you develop an investment plan for the post-COVID world and the economic shift it brings. 

Give us a call at 954.474.1776 to learn more. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Recovery from the COVID-driven recession likely won’t be linear, and the commercial real estate sector could be in for some volatility in the coming months.

There’s no doubt many businesses are feeling COVID-related economic struggles because of issues like high unemployment, social distancing rules, the changing workforce, and limited population mobility.

The economy will recover from this, but we don’t know how long it will take or its long-term effect on all sectors. Much of the rebound will depend on the vaccine roll-out and how quickly life returns to normal once the pandemic is over. 

Here’s a look at how the recovery could play out and the influence the pandemic may continue to have on the commercial real estate industry.

The alphabet of recovery scenarios

We don’t have a full picture because economic growth will depend on the vaccine roll-out’s speed, the spread of new variants of the virus, and potential government interventions. Recovery could also vary by industry—hard-hit sectors like hospitality businesses are probably in for a longer haul than specific retail companies.

A visualization of the overall economic recovery can take on many different shapes:

The Z-shaped economic recovery is when a temporary boom follows a quick downturn as people are allowed to get back out. After that, there’s a return to “normal” pre-pandemic levels. 

A V-shaped recovery occurs when there’s a downturn, followed by a quick return to pre-pandemic levels. It’s like a Z, but the temporary boom isn’t all that temporary.

With a U-shaped recovery, the recession lasts longer than with a V-shape before a gradual upturn occurs. A “swoosh-shaped” recovery is similar, except the economy bottoms out for a bit longer before slowly returning to norms.

Perhaps the most volatile recovery is a W-shaped one, which would see the country start to recover, only to have the bottom fall out again. It would then inch toward pre-pandemic levels long-term.

The worst-case scenario is an L-shaped recovery, where we stay in a lengthy recession with no recovery in sight. 

Finally, there’s what we believe may happen, particularly for commercial real estate. In a K-shaped recovery, some sectors recover quickly and enter a boom period, while others struggle for the foreseeable future. 

Opinions on where we’re headed vary, although a K-shaped recovery is occurring, to some extent. A V- or U-shaped recovery could also be in our future, but that’s likely dependent on a swift vaccine roll-out for the entire country.

Potential risk factors

Of course, the country’s economic recovery is dependent on many different elements. After all, the virus remains part of our everyday lives for the time being, limiting activities in every sector.

One significant risk factor is virus mutation. With new strains and variants emerging from places like the UK, Brazil, and South Africa, COVID cases could increase substantially before a widespread vaccine roll-out. The existing vaccines might not be as effective against these new variants either, slowing down economic recovery even further. COVID variants becoming a significant issue could drive a W-shaped curve.

Rolling out a vaccine to 330 million people was always a logistical challenge, and that has not changed. It will take some time to get enough individuals vaccinated to defeat the virus, and there could be supply chain problems like we’ve seen in Europe and Canada, too. Delays to the roll-out could slow recovery in the coming months. A lengthy delay could bring about a U-shaped economy, with a worst-case scenario turning it into a W or L.

In addition, there’s uncertainty surrounding how lenders and the government will handle foreclosures and debt service. From a commercial real estate standpoint, there are many empty retail and office buildings and many more tenants who have taken on significant debt to stay in their facilities. 

Lenders will want to avoid mass foreclosures, but that might not be possible without government money coming in to support them. And widespread foreclosures and bankruptcies could cause a W-shaped recovery.

What this all might mean for commercial real estate

Much like everywhere else, there’s a lot of uncertainty surrounding commercial real estate. Big banks are currently holding over $2 trillion in commercial real estate loans, and the losses they absorb from those who default could hinder the entire economy. 

Office space drives much of the commercial real estate sector, and it is experiencing rising vacancies and falling rents overall. If these results hold, office property values—specifically in specific configurations and areas—could decline significantly, with hotels and various retail buildings falling even further.

There’s hope that a swift vaccine roll-out will convince consumers and businesses to return to their previous habits, like dining out, buying at stores, and working in downtown offices. But there’s no guarantee.

That said, one of the hallmarks of a K-shaped recovery is that certain sectors will thrive—and are thriving. Warehouse space that underlies e-commerce, big-box retail that sells essential goods, and even office space in certain areas (like the suburbs) either may do well or are already seeing great returns. By carefully choosing investments, there are paths to navigate the COVID CRE economy successfully. 

Getting the right advice

Since CRE and the economy remain uncertain—and the trend could continue for some time, it remains crucial to evaluate each potential investment and property carefully. 
Morris Southeast Group can assist as you assess the best course to take during changing conditions. For investment or commercial property advice, give us a call at 954.474.1776. Ken Morris is also available directly at 954.240.4400 or kenmorris@morrissegroup.com.

Inflation brings about uncertainty, but CRE could be a stable investment to protect against its outcomes.

There’s a non-trivial chance that we’re heading toward a lengthy period of high inflation because of the Federal Reserve slashing interest rates and government debt reaching unprecedented levels. The result would be money being worth less, lowering the value of stocks and other long-term investments. 

While this trend seems like bad news for all investments, tangible goods, or hard assets, tend to increase in or maintain value to counteract the forces of inflation. Therefore, these vehicles are worth considering when interest rates fall precipitously, debt expands, and inflation may rise.

Key takeaways

  • We are possibly approaching a period of high inflation
  • Hard assets can hold their value relative to other investments
  • Commercial real estate is worth considering as a hedge against potential inflation

What inflation does to investments

Periods of high inflation cause issues in many segments of the economy, albeit in different ways. 

For investors, they can erode the value of stocks and reduce corporate earnings. The average consumer will also have less purchasing power. At the same time, inflation favors those who borrow before its onset because the borrower will make repayments in lower-value dollars. 

Investors should have a firm grasp on how to prepare for periods of high inflation to ensure they protect their money and capitalize on this shift in the value of a dollar.

Investment strategies during an inflationary period

Investing in hard assets like gold and oil is one commonly recommended strategy during a period of high inflation. The reason is that these assets have tangible utility and theoretically stable value.

For example, if the US dollar tanks, it’s argued that gold will retain more value because it’s a useful commodity. The same goes for oil, as some analysts believe the overall demand for petroleum products isn’t going anywhere, no matter what happens elsewhere in the economy. Putting money into these assets is considered protectionary against other economic downturns. Even if stocks and bonds stop producing, hard assets will still hold onto their value.

Commercial real estate is also on this list of hard assets—and it’s specifically worth considering for various reasons.

Commercial real estate as an investment option

One element that makes commercial real estate a desirable hard asset is its income-generating potential. 

Unlike an asset like gold that the investor will have to sell to turn a profit, real estate can generate monthly income to further protect against inflation. Additionally, the amount tenants are willing to pay can increase exponentially during an inflationary period, reducing the risk associated with the property’s resale value.

Assessing risk is a crucial factor when making any investment. And a hard asset that generates monthly income has particular value because it significantly reduces this risk. Rather than holding onto the investment and weathering losses during an economic downturn, owners can continue collecting rent and profit.

Another reason to consider commercial real estate investments during an inflationary period is the lower interest rates. Taking advantage of these rates reduces the real risk of purchasing the property. That said, cheap money does not always mean easy money. For example, while interest rates moved to historic lows after COVID hit, lenders also started closely scrutinizing borrowers to ensure they would recoup their investment.

Another consideration is that commercial properties require time and energy to achieve an ROI. How much time and energy depends on the property, its location, and the tenants it attracts. Finding a long-term, low-maintenance tenant takes effort, but achieving this makes a property incredibly rewarding in any economy.

Making smart CRE investments

We’re still sorting out the long-term effects of the COVID-19 pandemic, and portions of the economic recovery will take years. However, interest rates are extremely low, making it a good time to borrow if an investor has a well-researched opportunity backed by requisite credit-worthiness and resources. We also know that government debt is at an all-time high, which could drive an inflationary period. 

Commercial real estate investments in specific business sectors may become an increasingly valuable option if inflation soars, by providing immediate returns through rental income while holding value long term. And given that CRE can be an excellent investment in almost any economic conditions, diversifying a portfolio into income-generating real estate as a hedge against inflation may provide additional benefits.  

For more information on current CRE trends and the ever-changing market, call Morris Southeast Group at 954.474.1776. Ken Morris is also available directly at 954.240.4400 or by email at kenmorris@morrissegroup.com

Many Millennials no longer want to live and work in urban centers—but how much of the shift is driven by the pandemic or whether it’s a lasting trend is unclear.

As Millennials start having children and wanting different things out of life, many find suburban living more appealing. This trend started before the global pandemic forced everyone to distance from one another, but there’s no denying that COVID has considerably sped up the process. 

Today, many Millennials want to live away from the city’s bustle, in places they’re more likely to have a yard, access to parks, and good schools nearby. They’re also finding suburban properties more affordable. 

At the same time, this generation wants shops, restaurants, and other essential services within an accessible distance. And soon, employers who set up offices in suburban neighborhoods could become more appealing, especially when people return to the office after the release of a successful vaccine. 

The challenge is determining whether this movement from the cities is transitory or marks a lasting decentralization of the workforce. If it’s the latter, moving to a hub-and-spoke living and working environment could make suburban offices a far more valuable commodity.

Factors driving this trend

Many factors are coming together and encouraging people to leave cities. 

First, there’s the cost, as an apartment within the downtown area of a market like New York or Miami is prohibitively expensive. When buyers and renters can get far more living space at a lower price, suburban living becomes very appealing. 

Living in the city is also a challenge because you’re unlikely to have any private outdoor areas. COVID has made this lack of space almost unbearable, forcing city-dwellers to either spend their time indoors or head to public outdoor areas and risk infection. The suburbs have yards and quiet streets, both of which are advantageous during a pandemic. 

Buying in an urban area also involves far higher property taxes, despite owning less space. Millennials aren’t seeing value living in the city and are looking to stretch their real estate dollar a little further.

Of course, the current work-from-home opportunities are partially driving this trend. Those moving to the suburbs don’t have to worry about commuting because they’re working from home. However, we don’t know if these people will want to stay in the suburbs once they fight traffic on their way to a downtown office. 

How companies are reacting

COVID-19 has brought numerous challenges for businesses of all sizes, not the least of which is keeping employees safe. For many companies, this means allowing workers to stay home. 

Some companies, such as Microsoft, are turning work-from-home into a permanent solution. The company will allow most of its employees to stay home about 50% of the time post-COVID, with some individuals being eligible for full-time remote work with manager approval. 

Microsoft’s headquarters are in Redmond, Washington, a suburb of Seattle, with other offices in smaller cities like Albany, New York, Bellevue, Washington, and Alpharetta, Georgia. The company also has a location in a suburban section of Austin, Texas, with its lone big-city urban office sitting in downtown Atlanta. 

If the movement away from the cities continues, we could see more companies following Microsoft’s lead. More businesses may set up shop in less-populated cities and suburbs, allowing employees to work-from-home at least part-time.

Will it last?

If the workforce wants to remain in the suburbs, there’s a good chance commercial real estate values will follow the same trend. After all, the whole reason why many headquarters relocated to the cities in the first place was to attract Millennial talent that lived and played in those urban centers. 

With a large percentage of the workforce now looking to escape the cities, it makes sense that companies would relocate again to give employees a shorter commute, which could potentially attract talent to their organizations. 

There’s no telling if the move away from the metropolis is permanent. Once we have a safe and efficacious vaccine, individuals could realize that they miss the city and migrate back to the high-rises they abandoned in 2020. But they also may like the re-imagined suburbs, and permanent part-time-remote arrangements will mitigate the inconvenience of a long commute.

This trend creates an interesting CRE opportunity. A fundamental shift in the location and type of office space companies are looking for will, of course, impact the values of specific properties—and smart investors will be watching.

For more information on current CRE trends and the ever-changing market, call Morris Southeast Group at 954.474.1776. Ken Morris is also available directly at 954.240.4400 or by email at kenmorris@morrissegroup.com