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The Impact of COVID-19 on Existing Commercial Real Estate Trends

suburban office park

The pandemic and the economic downtown impacted—and accelerated—some CRE trends significantly. 

Although COVID-19 led to a global economic downturn, it hasn’t ended up as severe as some early projections estimated. In June 2020, the World Bank reported that the pandemic could plunge the world into a recession not seen since World War II, but it hasn’t reached that level and seems unlikely to do so. 

By many metrics, the recession hasn’t been as bad as the one in 2008, especially because some industries exceeded expectations during the pandemic. Commercial real estate, in particular, hasn’t experienced the widepread, cataclysmic downturns seen in some sectors—at least on the surface. And many analysts believe we are on the cusp of a rapid economic recovery.

Nevertheless, some types of CRE were hit far harder than others. Overall, the industry is likely still in for some turbulence, given the delay in foreclosures and evictions due to moratoriums. And CRE is going through a transitional period because of how the recession hits different aspects of the economy—and influenced some trends that were already in motion.

Here’s a look at a few of the trends impacted by COVID-19 and what they could mean for the future of commercial real estate. 

Multifamily properties in the suburbs

The move to the suburbs is nothing new. And for all the criticism their generation receives, Millennials know what they want and don’t seem afraid to get it. 

In this case, fewer Millennials are looking for apartments in downtown urban centers, instead opting for property in the suburbs. The reasons: they can buy or rent a large home with more land, the cost of living tends to be lower, and they aren’t necessarily worried about a commute if it means more comfort at home. 

This generational move to the suburbs was already underway before the pandemic. Still, the fear of getting sick and the shift to remote work, among other factors, have accelerated things. And this may spur persistent demand for suburban multifamily properties in the coming years, including more construction

This trend’s scope will depend on whether the claims heralding “the death of big cities” are overstated and how quickly those urban centers rebound after the pandemic.

Suburban offices

Hand-in-hand with people moving away from major cities are offices setting up in suburban areas. This trend has been gaining momentum for some time, with COVID-19 again accelerating it.

Companies are adjusting, with many opening suburban offices to attract talent. The Millennial generation will dominate the workforce for the foreseeable future. And if they want to work and live in the suburbs, companies and properties will have to accommodate them.

Much like suburban multifamily CRE, these offices gained appeal because their location made it easier for employees to avoid clusters of people during COVID-19. This shift may continue, but it must be assessed in tandem with the move toward remote work, given the huge number of companies adopting some form of that model permanently. The overall demand for office square footage may lower along with a change in location.

Amenities in the office

There was some pre-pandemic movement toward the hotelization of the office. The idea is that the workplace contains many at-home amenities, like a kitchen, fitness center, comfortable furniture, and private spaces. Much of this trend—along with the customization that tenants routinely expected in large office leases—came to a virtual standstill last year.

In essence, it made little sense for businesses or property owners to make significant investments in a climate of extreme uncertainty. And because the pandemic spurred tenants to sign shorter leases, the numbers became questionable, and lenders were understandably hesitant to back such projects.

However, the return to the office following COVID-19 and a corresponding economic boom may put customized offices with enhanced amenities back on the table. Analysts from major financial institutions are projecting 6-7 % growth in gross domestic output this year, along with a hiring spree that may result in near-record employment.

As economic confidence increases along with the competition for talent, employers could take another look at customizing offices. And they may start signing the longer-term leases that make doing so possible.

Will a vaccine change things?

As we get closer to mass vaccinations and, eventually, herd immunity from the coronavirus pandemic, there will be questions about these trends’ durability. 

However, we don’t yet know if the vaccines will completely work against the virus’s emerging variants. And analysts are uncertain of the extent to which behavior will change after herd immunity is achieved—specifically, how much and how quickly individuals will return to pre-pandemic norms. 

It’s essential to keep a close eye on evolving trends, tactics, and considerations—but assess all of them carefully 

COVID-19 sped up certain changes, but some of them aren’t a big surprise to many investors. For example, the move to the suburbs has been happening for years, despite its new momentum. In every case, investors, developers, tenants, and other stakeholders should avoid putting complete faith in any trend and continue to pay close attention to local economic, broad-CRE, and sector-specific outlooks.

Whether you are a tenant, property owner, or potential investor, Morris Southeast Group can help as you assess the best way to proceed. Give us a call at 954.474.1776 for commercial property advice you can trust. You can also speak with Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

Inflation or Deflation: What Will We See in the Post-COVID World?

post covid economic recovery

Many analysts believe we will enter an inflationary period, but some predict the inverse

A return to normalcy is drawing closer with news that the United States could distribute up to 500 million vaccine doses by the end of June. This number would mean there’s enough product on the market to vaccinate the country’s entire adult population, potentially ending the pandemic.

From there, pockets of virus infections could pop up in schools or within the unvaccinated population. Still, the numbers would be far lower, and hospitals would certainly have the capacity to handle these patients. 

The result should be a significant reopening of businesses around the country—and a potential boom. But public debt is at record levels, and low interest rates may rise. What could all this mean for the economy?

There are arguments suggesting that we could experience a period of inflation, while a few analysts posit we might even be in store for deflation. Here’s a look at both of these possibilities, along with what they might mean for the commercial real estate industry.

Why we could see inflation

The main argument in favor of inflation in the near future involves the influence of debt and quantitative easing (QE) on the economy. This process injects money into the marketplace to stimulate spending. Those who believe inflation is on the horizon suggest that QE almost certainly leads to inflation, particularly affecting the stock and real estate markets. 

Another reason for potential inflation is lower interest rates. Money is incredibly inexpensive to borrow right now, typically leading to more of it making its way into the economy. However, as businesses spend more of this borrowed money, it creates a tower of debt. (The same, of course, is true for the federal government.)

If repaying this debt becomes too much of a burden, the system may be severely strained. At this point, inflation is likely to follow because the only thing that reduces the debt burden at the government level is the decreasing value of money.

This theory on inflation may take years to manifest. But there is also a possibility we could see it starting to take hold in the early days of the post-pandemic world

Will people be so happy to return to normal that they frequent restaurants and buy items they can’t afford?

How quickly can businesses return to normal, and can they repay the loans they’ve received?

Will the government debt spiral have premature consequences?

The argument for deflation

Despite many concerns about inflation, other economists feel that the COVID recovery process won’t increase inflationary pressures for a couple of reasons. 

First, there could be lower consumer demand for goods and services than expected because people simply don’t have the money due to unemployment. Some individuals could be reluctant to return to normal, too, until there’s more data supporting the vaccine’s efficacy. 

In this situation, lower consumer demand would offset the inflationary boost of an increased money supply. As a result, dollars won’t change hands at extreme accelerating rates, and there might not be significant inflation. There could even be deflation if spending drops far below expectations as we move into the summer months.

Second, even if the economy does recover rapidly and consumer spending increases right away, a good proportion of businesses will remain in a recovery period for the remainder of the year. These entities may not have to borrow as much, limiting their new debt while using the influx of consumer cash to pay down their existing debt. 

These arguments suggest an increase in available cash will go toward recovery rather than factors that drive inflation. An increase in consumer spending may also decrease the reliance on borrowed money moving forward.

What this might mean for CRE investment

Commercial real estate investors will want to keep a keen eye on this situation. Lower than average interest rates can create prime borrowing opportunities on available properties, but they’re only worth an investment if economic recovery leads to demand for the specific spaces.

Questions about whether businesses will recover rapidly and expand or stay in a holding pattern for the rest of 2021 remain, so monitoring developments is essential.

It’s also worth noting that income-generating CRE is a reliable hedge against inflation because rental prices increase with inflation. As a result, investors don’t necessarily have to worry about the devaluation of money outpacing their returns.

Monitoring or expanding your real estate portfolio during this recovery period calls for significant due diligence, as recovery will likely be different all over the country. Morris Southeast Group can help you keep an eye on the post-COVID environment and determine whether a specific investment makes sense.

To learn more, contact Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

What Can We Expect From Retail in 2021?

sign showing store reopening

Retail had a turbulent and uneven ride during the COVID-19 pandemic, but a broad recovery should follow once most Americans receive a vaccination.

It goes without saying that 2020 was an incredibly challenging year for many brick-and-mortar retailers as pandemic-related restrictions made turning a profit an uphill battle.

Although recovery likely won’t be linear, and some sectors will get back to pre-COVID levels faster than others, 2021 should see cities all over the country lift these restrictions and allow businesses to operate at normal levels.

The commercial real estate industry could see vacancies fall as a result. Nevertheless, some of the economic pain was delayed as businesses struggled to get to the other side of the pandemic—so additional foreclosures are in the cards. And some risk factors remain, including coronavirus variants extending lockdowns and online shopping becoming an even more common replacement for brick-and-mortar options.

Here’s a look at what we might expect from the retail industry in 2021:

An economic recovery 

It’s reasonable (though not certain or specific) to expect a broad economic recovery in 2021, as more people will return to work, more businesses will reopen, and more money is pushed into the economy.

Naturally, this bounce-back will rely on a successful vaccine rollout and these shots working to control emerging COVID variants. There is a reason for optimism, though, as President Joe Biden believes there will be enough doses for every adult in the country by the end of May. Nevertheless, as with the recession, a recovery could be incredibly uneven depending on the industry. 

Overall, retail sales recovered adequately after the initial lockdowns in April 2020, with spending exceeding pre-pandemic peaks in July and August. These numbers happened even with restrictions in place in much of the country, so high retail sales numbers should be expected this year.

At the same time, not every retail sector did well. For example, clothing store sales were over 21% lower than their pre-pandemic levels. In contrast, home improvement shops, grocery stores, and sporting goods retailers had higher-than-average sales last summer. Of course, e-commerce took off during the pandemic, securing a larger piece of the retail pie than ever before. And it’s a safe bet that online shopping will continue to grow because more people are comfortable with it, accelerating this fundamental shift. 

A closer look at online shopping

It should come as no surprise that online purchases increased by over 30 percentage points at the height of COVID, as many consumers had no choice but to buy their goods digitally.

What’s noteworthy about these numbers is that some of the most significant gains were in the personal care, pharmaceutical, home furniture, and electronics industries, so people were buying everything from essential goods to luxury items online.

Jessica Liu, co-president at the e-commerce multinational Lazada Group, projects not only will more people shop online in 2021 than ever before, but local small and medium-sized businesses will have to get in on the action to stay afloat. The trend will create an even more robust online shopping environment where consumers don’t necessarily have to rely on Amazon and other e-commerce giants.

How commercial real estate investors can adapt

As it stands, there could be tremendous upside in commercial real estate investment in 2021, particularly in the latter half of the year. However, it could take some creativity to determine how to leverage the recovery—and where it will occur—when shopping returns to stores.

If online shopping remains as popular as it has been during the pandemic, warehouses and fulfillment centers will continue to be a good investment as more stores—both e-commerce and newly hybrid retailers—will need these spaces. 

Likewise, there is a strong assumption that consumers have been missing the in-person shopping experience. So the broader brick-and-mortar retail environment may return to pre-pandemic levels, even in hard-hit sectors like clothing. Investors will want to keep tabs on the latest trends, as we’re entering a once-in-a-generation recovery period that could go a number of ways.

Getting CRE perspective and assistance 

Since so much will likely change in the retail environment in 2021, flexibility likely remains paramount—and due diligence certainly will. Consumers have never had as many choices when seeking goods, and the entire globe is now a marketplace that can serve buyers anywhere. Commercial real estate investors must carefully evaluate individual investment opportunities and assess how consumers want to do their shopping if they consider retail-related properties.

Morris Southeast Group has the insight, market knowledge, and resources to guide you through the real estate decision-making process. Call us at 954.474.1776 to inquire about the current trends in South Florida CRE. You can also contact Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

Social Distancing Layout Tips For the Office

Social distancing could remain necessary for a period, even after the COVID-19 vaccine rollout

Although it appears as though most of the American population will have access to a COVID-19 vaccine by the summer, many questions remain.

First, the vaccines might not work as well on some of the virus’s emerging variants, particularly if it mutates further in the coming months. Second, the vaccines might not prevent the virus from spreading, making it essential to protect those who have not received their doses. Finally, it could take the public some time to return to normal psychologically—individuals may not feel completely safe while gathering.

In the workplace, this means social distancing practices could remain necessary in the coming months and beyond. Property managers should be aware that many companies will want to put social distancing protocols in place as employees return to the office. Businesses looking to lease offices may need to evaluate spaces with these considerations in mind. 

Here’s a look at some layout tips for organizations looking to socially distance while keeping the workplace attractive and productive:

The six-foot rule

One of the most important protocols to follow in a socially distanced office is the six-foot rule, where all workspaces are at least six feet apart. It’s goal, of course, is to keep employees away from each other physically, minimizing direct person-to-person transmission.

When designing a socially distanced office, the main thing to remember is that there must be space between desks and workspaces. However, the design can maintain a sense of community within the office by offering larger communal areas where it remains possible to have a socially distanced conversation.

Open-concept offices may have lost favor in the past decade, but many are paying dividends now because they tend to be adaptable. The floorplan allows companies to space people out while erecting temporary barriers. Adding closed offices and creating meeting spaces with six feet between seats are also options. 

Physical barriers

It isn’t always possible to stay six feet apart, particularly in a busy or small office space. As a result, installing the aforementioned physical barriers could become necessary for some companies. The type of physical barrier depends on how the business operates. 

For example, in an open-style office, installing plexiglass barriers between workspaces that are facing each other is one way to keep some collaboration while mitigating the spread of virus particles. Other companies might opt for cubicles or closed offices. 

Of course, constructing closed offices is a significant renovation when done on a large area. However, adding a few semi-closed spaces may create the best of both worlds for certain buildings and tenants. 

Identify high-traffic areas

Every office has high-traffic areas that act as a gathering space or bottleneck. These locations could be hallways, elevators, specific desks, or the breakroom. Large lines of desks can also turn into high-traffic areas where workers are always passing each other as they attempt to reach their workspaces. 

By eliminating some of these high-traffic areas, designers can reduce employees’ chances of getting too close and spreading COVID. But a more practical option is often setting and enforcing social-distancing rules for employees who use these spaces.

When re-configuring an office, look for locations with worn carpet or floors. This damage indicates that the area is a high-traffic spot that should adapt to prevent too many people from passing each other or gathering. Removing desks or chairs from these locations may be a good start, as it eliminates reasons for people to stop and linger.

Small meeting spaces

Meeting spaces will be necessary to make in-person collaboration possible, of course. Again, procedures and adaptations are called for.

As a rule, meetings must be small enough to socially distance in a given space. And instead of putting numerous employees in a single room for large-scale meetings, spreading everyone out and augmenting the audience with technology makes a lot of sense.

Finally, many companies are leveraging outdoor meeting spaces because of the virus’s spread via circulating indoor air. Properties with appropriate outdoor areas—roof decks, large patios, etc.—could be a valuable amenity with added seating. This may be less practical in South Florida as we hit our brutal summer, but it is an option well into spring in most areas of the country.

Offer additional space

As more employees return, businesses may be looking for additional space to keep their workers distanced. While some companies opt to let a percentage of staff work from home, others will seek larger offices or flexible space in the same building.

Having flexible office layouts allows property owners to rent out space as a service. In this set-up, a business may lease temporary space in the building for meetings, collaborative projects, or overflow offices. Such flexible spaces could remain in demand as companies look for creative ways to keep their employees separated, while providing alternative revenue streams for property owners.

Hope and herd immunity are on the horizon. But we must stay adaptable in 2021

Companies’ wants and needs are continually evolving, and the next few months will undoubtedly see many things change. 

Will corporations let the majority of employees stay home?

Is flexible office space a durable trend or will the pandemic’s end put highly customized offices back in vogue?

Is some form of COVID-19 here to stay?

There’s still a lot to be determined, but Morris Southeast Group is monitoring the situation and works to provide the insights you need to create attractive spaces for tenants. For more information, reach out to us at 954.474.1776. You can also contact Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

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