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A Look at the Post-COVID Recovery of the Hotel Industry

masked woman in hotel lobby

The pandemic is severely challenging the hotel industry, and a bounce-back could take some time.

Although the pandemic is causing massive economic disruption and putting numerous sectors in trouble, perhaps no industry is experiencing more significant challenges than hospitality. Consumers aren’t traveling anywhere near pre-COVID levels despite the lift of initial travel restrictions, putting a severe strain on businesses in this sector.

Most notably, the hotel industry is struggling, as vacancies remain higher than usual in most cities and don’t show signs of returning to pre-pandemic levels. The revenue per available hotel room decreased 50% between 2019 and 2020, and about 25% of all hotels in the country are at risk of foreclosure.

Here’s a look at what the future could hold for the hotel industry and how quickly it may recover once the majority of the population receives a vaccine.

All hotels rely on travel—but different types of it

The hotel industry depends on people traveling, of course. But a more in-depth analysis considers why people visit specific destinations.

Many Florida destinations run on tourism as visitors head to the beaches to enjoy the sun. But the central business district in Miami, for example, is far more reliant on business travel, whereas hotels near South Beach cater to the party crowd. As a result, different properties may recover at different rates. 

Many companies still have the money to spend on travel. But will business travel completely bounce back in a rush to return to face-to-face meetings once restrictions lift? Or will continued employee reluctance and the newfound reliance on virtual conferences and saving on travel expenses endure?

On the other side of things, recreation may be durably impacted by nationwide job losses. Despite the public wanting to travel, the money might not be there for many aiming to do it. A broad economic recovery—including an unemployment rate near pre-pandemic levels—may be necessary to increase vacation spending dramatically.

Luxury properties are the hardest hit

One trend worth noting in the hotel industry is that luxury properties have experienced the most significant occupancy decreases. 

This makes sense, given that travelers are more likely to opt for a luxury hotel on vacation than they are on business or when just passing through a city and stopping in for a night or two. 

In May, luxury hotels were operating at 15% of capacity, compared to economy hotels at 40%. These numbers suggest that the clientele that economy hotels rely on, such as truck drivers and extended-stay guests, are still using hotels at significant levels. Tourists, on the other hand, are not. And these figures signal that the luxury hotel industry could take longer to fully recover.

Some locations are worse than others

Another factor to consider in the recovery is where a property is located. Hotels in large, fly-in cities like New York and San Francisco are harder hit than beachfront locations like Fort Lauderdale, Charleston, and Myrtle Beach.

The reason: large segments of the population can drive to Fort Lauderdale, Charleston, and Myrtle Beach to spend the weekend lounging on the beach. Destination cities were far more reliant on fly-in guests, and many people still avoid air travel because of COVID risk. 

However, small, vacation-friendly cities with large urban populations within driving distance saw decent tourism numbers last summer. These properties could bounce back before air travel returns to pre-pandemic rates.

How recovery might look

The hotel industry’s recovery could take many different forms, as much of it relies on how quickly the vaccine rollout occurs. There’s also the question of whether or not the vaccines will work against new COVID variants, as virus mutations have the potential to extend the pandemic—on some level—indefinitely.

Realistically, a full COVID recovery could take years. S&P Global Ratings put out a report in November suggesting that the downturn in U.S. lodging could last until 2023. There are many reasons for an extended recovery period, with the simplest being that many travelers may spend their money more carefully for some time. 

It’ll also take some time for concerts, conventions, sporting events, and other mass gatherings to become normal again. Even with a vaccine, many individuals could remain hesitant to gather in crowds, staying close to home for the short term.

Evaluating the hospitality industry and the CRE implications

We don’t know when tourism and hospitality will fully recover. And some properties will never bounce back from the lost income. If the current downturn lasts until 2023, many more hotels will be forced out of business, a trend that could be particularly common with luxury hotels.

However, there is a reason for some optimism—the federal government plans to vaccinate 1.5 million people per day. This pace would see 150 million doses administrated by early May, taking the country significantly closer to the herd-immunity threshold. Those numbers could improve further as easier-to-distribute vaccines receive final approval, and a return to normal could be here by summer. Nevertheless, the hotel industry is undoubtedly in for more of a struggle.  

Morris Southeast Group is closely following the economy and can offer insight into the hospitality sector and other CRE areas. You can contact us to learn more by calling 954.474.1776. You can also speak with Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

Does the Hotelization of Offices Work in the Age of COVID?

kitchen in an office

More services and amenities could be the key to attracting tenants. But the difficulty of obtaining capital for customized improvements puts up barriers to “hotelizing” offices.

COVID-19 is speeding up the work-from-home revolution, as more employees are avoiding the office and working remotely than ever before. 

Pew Research Center reports that 71% of workers with the ability to complete their duties remotely are doing so, and 54% of them want to continue working from home after the pandemic. This number shows an increase from the 20% of employees working from home before COVID-19, indicating a durable shift in the work environment. 

Regardless of the stats, many employers will require workers to return to the office after a complete vaccine rollout. But there could be resistance from individuals who have become accustomed to the convenience and amenities of working from home. 

This may spur a second look at “hotelizing” the office, which involves bringing many of the amenities found in hotels—and the home—into the workplace.

What is the hotelization of an office, exactly?

To understand the concept, consider the amenities that most hotels contain. 

For starters, there’s often a grand lobby with comfortable furniture and plenty of places to relax. Adding cozy couches, sturdy coffee tables, high-end décor, and classy flooring creates an upscale atmosphere that can make the office seem more like a “destination.”

The furniture in a hotel lobby is often well-spaced to offer privacy. And such spacing is an essential trait in the post-COVID world, given social distancing requirements. Including comfortable furniture also provides casual locations for meetings, helping employees feel more relaxed at work. 

Next, think about the other amenities a hotel offers. There’s likely a fitness facility somewhere in the building, perhaps a salon, and rooms that have a full kitchen and dining area, as well. Adding these features to an office is beneficial for many reasons, chiefly saving employees time and money.

Workers who can stop at an onsite gym before or after work may reclaim another hour from their day. A kitchen provides the opportunity to cook a quick meal and avoid eating out. And various other amenities, from dry cleaning services to hair-care options, offer similar benefits.

The cost-savings and convenience of these facilities could be a significant factor in attracting new employees and retaining current ones, as well as attracting the tenants who need these workers.

As always, location matters

When someone books a hotel room, they usually choose a building close to their desired activities in that city. Getting into vehicles and driving to destinations is often a non-starter, so they’ll reserve a space within walking distance.

Businesses often take the same approach when selecting office space by leasing properties close to desired amenities. A location ideally has numerous restaurants, service businesses, and fitness centers nearby while providing plenty of parking or public transportation access—all of which reduce the need to hotelize the business property itself.

For investors, looking at what’s close to the structure is often just as important as the building itself. The goal is to provide as many convenient at-home amenities as possible to attract tenants.

The impact of shorter leases on access to capital and hotelization

Things that stand in the way of the extensive property improvements required to hotelize a space are economic uncertainty, the trend toward shorter leases, and stricter access to capital, despite extremely low interest rates.  

Companies are increasingly looking at short-term leases, making it financially unfeasible for building owners to significantly retrofit a building for potential tenants. Lenders are taking a hard look at the possible ROI of a project and the leases that underlie it to hedge their risk. And there is no sense in spending significant time and money to hotelize a space if enough tenants won’t commit long term.

One solution may involve creating flexible spaces or going with a hybrid model. For example, a large office building may have one or several long-term tenants on the upper floors, temporary space-as-a-service offices on the lower levels, and kitchen, dining, fitness, and other facilities on the bottom floors. 

The long-term tenants defray the risk while reaping the amenities, which also attract shorter-term tenants—possibly co-working spaces. The amenities are common areas for all lessees, defraying the expense in proportion to the potential ROI. And the on-demand office areas can provide additional office or meeting space for long-term tenants when they need it, increasing flexibility as more employees return to work. 

Looking to the future

While it’s impossible to tell precisely how the economic recovery and post-COVID return to the office will shake out, we know that many employees love working from home—and some may never look back from the experience. At-home-like workplace amenities could make the return more palatable, plus attract new tenants and the new employees they need. 

Regardless, the customization required for hotelization is held up by shifting and reduced overall demand for office space in some areas, along with the trend toward shorter leases as businesses navigate an uncertain environment. Individual situations and needs will vary, but we suspect much of the hotelization trend will be put on the back burner until the pandemic’s aftermath becomes clearer. 

The commercial real estate landscape is quickly evolving as we’re going through an unprecedented period of volatility. At Morris Southeast Group, we have our eyes on the situation and can help investors and tenants navigate the present and future of CRE. Contact us at 954.474.1776 to learn more. You can also reach out to Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

Is the Open Office Concept a Thing of the Past?

employees in open office

The need for social distancing is sure to amplify many pre-pandemic questions about the efficiency of open offices.

The open-concept office is widespread in corporate America, though it has taken some hits in recent years. The movement first gained traction in the 1970s and remains a go-to setup for many businesses around the country.

The reason behind this popularity is that these layouts maximize the use of space and can save on costs, plus spur collaboration. The idea is that workers can’t hide in their offices all day and must interact with colleagues, improving teamwork and productivity.

But research suggests that these setups sometimes do the exact opposite, as employees learn new ways of avoiding each other and the distractions that come with an open office. COVID-19 is also creating fundamental issues for the concept, given that physical barriers are crucial for maintaining social distancing.

Here’s a look at the present and future of the open office—and how commercial real estate owners can adapt to businesses’ ever-changing needs.

Despite their promise, open offices might not drive interaction

Even before the pandemic, there were growing questions about the viability of the open-concept office. Managers noted that employees could deflect interaction in an open setting just as quickly as they could in a cubicle or closed office by using headphones, pretending to be busy, and avoiding eye contact.

In fact, the Harvard Business Review reports that some firms have witnessed face-to-face interactions drop by 70% after switching to open offices, suggesting that this type of space isn’t meeting its objective. Employees make up for the decrease in face-to-face interaction through electronic communication, despite having the ability to speak in-person.

Keep in mind that these numbers are from before COVID-19. Living through a pandemic has changed office interaction even further or eliminated it altogether, at least in the short term.

The impact of COVID-19

Of course, we live in a different world than we did a year ago. And it doesn’t look like we’ll return to normal for some time. Even after a successful COVID-19 vaccine rollout, we could see new strains of the virus make the office a stressful place to be. 

There are currently social distancing protocols in most offices that make collaboration more challenging. Physical barriers are necessary to stop the spread of the virus within the workplace, further reducing the viability of open offices. For example, many desks or workspaces now have plexiglass barriers between them. Employees can see each other but not interact closely, defeating an open office’s intended purpose.

There’s also the possibility of many employees demanding a closed-off work environment as they return to the office. Workers want to stay healthy, which means limiting the extent to which they physically interact with others.

What these changes mean for CRE

From a commercial real estate perspective, adaptability is essential. We can no longer assume that companies will want open-concept offices because they may be an outdated or even dangerous format as workplaces reopen.

CRE owners should be aware that organizations will want different things from their office space and maintain the flexibility to adapt. This could include renovating space to allow for more room between employees or, in more extreme cases, building out exclusively closed offices.

Organizations that continue to use open concepts need physical barriers in place, at least near-term. Plexiglass might work in some situations, while other offices might want cubicles or other barriers to further separate their staff. Then there are cleaning protocols, foot-traffic procedures, and growing demand for HVAC improvements. Since the virus primarily spreads through airborne transmission, a new focus has been placed on buildings’ air quality. For a thorough rundown of these safety issues and potential property improvements, read our previous blog.

We’re going through an unprecedented period of change in the traditional office setting. Keeping up to date on the trends could be the difference between renting a space and having it sit empty.

What the future holds

We’re not exactly sure how office space will evolve nor how durable specific trends will be. Much depends on the vaccines’ efficacy at fighting new variants of the virus and what particular companies and their employees prefer. If workers remain uncomfortable returning to open-concept offices, organizations and building owners will have little choice but to rework the spaces.

Commercial real estate owners should be aware that businesses could be looking for different things in the coming months and years and stay willing to adapt. More flexible setups — or owners who are willing and able to renovate to meet individual preferences — will attract new tenants faster. But certain offices in select areas may struggle to attract renters, regardless of the setup.

One thing is for sure: 2021 will be a pivotal year that will continue to introduce novel challenges in the commercial real estate landscape. And the ability to adapt will remain essential.

Morris Southeast Group has its eyes on these CRE trends and is dedicated to keeping our readers, clients, and colleagues informed. For more information on trends in office space or to lease or to find a property that is right for you, contact us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or by email at kenmorris@morrissegroup.com

Why Distribution and Fulfillment Spaces Could Remain in High Demand

inside distribution warehouse

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.

How the Post-COVID Recovery Could Look and What It Means For CRE

volatile financial trends

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.

Why Commercial Real Estate Remains a Solid Investment Despite the Risk of Inflation

graph depicting inflation

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

Is the COVID-19 Move to the Suburbs a Durable Trend?

Is the COVID-19 Move to the Suburbs a Durable Trend?

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

Commercial Real Estate’s Winners and Losers in the COVID-19 Economy

Although the pandemic is creating economic challenges worldwide, some industries are faring better than others and thriving because of the shift in consumer behavior.

COVID-19 has done a number on the American economy, with unemployment rates reaching 14.4% in April. By November, that number had dropped to 6.7%, but we’re still seeing fallout because consumers now aren’t using certain businesses in the same way.

In Florida, a shift in consumer behavior is driving much of this downturn rather than government-mandated restrictions. For example, people aren’t traveling as frequently as in pre-pandemic days, leaving much of the state’s hospitality industry in a difficult position. 

However, it isn’t all bad news, as some businesses are thriving in this economy. Here’s a look at how COVID affects various industries throughout the country and what it may mean for commercial real estate:

Struggling industries

Perhaps no sector has experienced more significant COVID challenges than the hotel industry, which has seen occupancy and revenue decrease at record levels. 

In Q2 2020, overall occupancy fell by over 60% from the previous year, despite the average daily rate (ADR) falling by over 37%. Rooms were cheaper, but people still weren’t renting them. The result: revenue per available room (RevPAR) is down by 75%. 

The Royalton Hotel NYC, once considered one of the city’s most exclusive properties for the rich and famous, sold to investors for $41 million in September. This price tag is a 25% reduction from its selling price in 2017. People simply aren’t visiting hotels as much during the pandemic, and it’s causing issues for investors.

Another industry that’s struggling is retail, which saw total sales decrease by 8.1% in Q2 of 2020. This decline is the most significant since the recession of 2009. 

However, it’s worth noting that some retailers are thriving in this economy, particularly e-commerce outlets and those that sell essential goods. It’s the smaller stores, certain big-box retailers, and shopping malls are struggling, although some of these spaces were being repurposed, even before COVID.

With the pandemic forcing employees to work from home, the office sector is experiencing some challenges keeping spaces occupied. The second quarter of 2020 saw leasing activity fall by 44% from the previous year, and the national office vacancy rate increased to 13%. 

Demand for downtown office space is decreasing at a more rapid rate than suburban real estate. This trend suggests that offices will still have plenty of value in the future, even if space in prestigious high-rises remains in less demand. 

Businesses benefiting from the shift

Again, it isn’t all bad news—some industries are actually reaping rewards from the change in consumer behavior. 

Amazon’s e-commerce successes are well-documented, with the company posting a record-level revenue increase of 37% during the second quarter of 2020. 

This trend isn’t exclusive to Amazon or online retail, though another windfall is related to the fortunes of e-commerce. The industrial and warehouse sector is seeing a bump due to the shift away from brick-and-mortar stores. Warehouses and distribution sites are in high demand, and these properties are experiencing low vacancy rates and asking for record-high rents as a result. 

Distributors are also relying less on China and other overseas entities because of the logistical issues with shipping goods right now. Keeping the supply chain moving involves ordering more products at once and storing them until needed, which is good news for industrial property owners. 

Also, since we’re dealing with a global health emergency and have an aging population, it makes sense that there’s a greater need for laboratory space. The life sciences industry is exploding, with properties re-selling for as much as 22-times their previous values. 

Strong tenant demand is driving this trend. And it could continue because of the need for facilities adhering to the Good Manufacturing Practice regulations for human pharmaceuticals. Labs that can meet these requirements have immense value, and many remain open 24 hours per day to keep up with demand throughout the pandemic.

Somewhere in between

Multifamily properties are going through the ups and downs of the current economy. Despite the harsh economic downturn in Q2, there wasn’t quite the expected rise in vacancies in apartment buildings and condos. The assumed reason: stimulus packages provided people with unemployment benefits aimed at keeping a roof over their heads. 

An average month’s rent has dropped by 1.4% since Q1, and vacancy rates increased slightly. But it could have been much worse, given the high unemployment rates. 

Urban areas and states with particularly high unemployment rates are being hit much harder than others, and there is a great demand for affordable housing all over the country.

A vaccine and the return to normalcy

Of course, the challenges caused by COVID-19 are driving many changes to the commercial real estate industry. People can’t interact at the same levels as this time last year, so there’s far less immediate need for spaces that encourage gathering or travel.

But there is some light at the end of the tunnel that could see us return to normalcy sooner rather than later. With the Pfizer and Moderna vaccines rolling out to the public and others potentially soon to follow, we might largely put this pandemic behind us by Q3 2021. 

At that time, hotels and retailers could see their numbers start to rebound, and demand for all office space could return, as well. For CRE investors, the coming months are incredibly important because a potential recovery could drastically change the economic landscape again.

For more commercial real estate insights, property management services, or CRE investment guidance, reach out to Morris Southeast Group at 954.474.1776. Ken Morris is also available directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Morris Southeast Group Closes 100,000 Square Feet in South Florida Commercial Real Estate Transactions

Morris Southeast Group Closes 100,000 Square Feet in South Florida Commercial Real Estate Transactions

Sunrise, FL; December 16, 2020 – Morris Southeast Group President Ken Morris, SIOR, RPA, announced 100,000 square feet of recently completed South Florida lease and sale transactions, plus a new listing in Plantation, FL.

Ken Morris, SIOR & Adriana Lilly represented Keratin Complex in a seven-year lease for 55,134 square feet at the Hillsboro Technology Center from Bristol Development and Butters Development. Keratin Complex is a leading maker of shampoos, conditioners, and related hair-care products. The company revolutionized the beauty industry in 2007 when a group of industry innovators discovered a new way to care for hair by merging proven keratin science with cutting-edge technology. They created Natural Keratin Smoothing Treatment, a first-of-its-kind smoothing treatment that pioneered the way to healthy, smooth, frizz-free hair. Keratin’s products are favored by salon professionals.

Ken Morris, SIOR, RPA

Ken Morris, SIOR, also represented Buena Vista Terminal, LLC in the sale of a property located at 123 NW 51st Street in Miami, FL. The property consisted of a 21,450 square feet building currently used for storage in the Buena Vista neighborhood of Miami and sold for $1,875,000. The Buena Vista Bus Terminal Building was originally constructed in 1939 and was a major transportation hub in South Florida. Used for decades as warehouse space, the property is ripe for conversion to multifamily housing, office suites, art storage, an art gallery, and several other options.

In addition, Ken Morris represented Polenghi USA Inc. in their 36-month lease renewal of 24,047 square feet of industrial space located at 720 Powerline Road in Deerfield Beach, FL. The Milan, Italy subsidiary of Polenghi Group converted a vacant warehouse building into a lemon juice bottling plant. These lemon specialists import about 25,000 liters of lemon juice weekly from Italy and then bottle it for distribution in the U.S. Morris originally put Polenghi in this space in July 2015, when the Italian company opened its U.S. operations.

Earlier this quarter, Morris completed a lease transaction on behalf of a longtime client, The Legacy Companies, for 78,585 square feet at 2555 Kuser Road in Hamilton, New Jersey. It was the third distribution center transaction Morris has completed for Legacy in 2020. Earlier this year, Morris represented The Legacy Companies in a 110,000-square-foot industrial property

lease in Reno, NV (also owned by Scannell Properties). The firm also executed a renewal of 61,137 square feet plus 8,700 square feet of expansion space at a Weston, FL property on behalf of Legacy in a building owned by a U.S. subsidiary of UBS.  

In addition to the closed transactions, Morris has been hired by BHT Partners to lease the Medical Services Building located at 4101 NW 4th Street in Plantation, FL 33317 that consists of a total of 48,560 square feet. The building is a medical office building located on the campus of Plantation General Hospital.

About Morris Southeast Group

For more than 35 years, Morris Southeast Group has been recognized as one of South Florida’s leading providers of commercial real estate services. Located in Sunrise, FL, Morris SE is a full-service firm specializing in owner and tenant representation, multi-market services, and investment sales in the office, industrial, and retail sectors throughout Miami-Dade, Broward, and Palm Beach Counties. Further, the firm serves corporations, private investors, and entrepreneurs in various U.S. markets through its membership in the Society of Industrial and Office Realtors® and other professional real estate relationships developed over years of industry networking. For more information, contact President Ken Morris at (954) 474-1776 or visit www.morrissegroup.com.

When To Use —and Not Use—Leverage In CRE

Positives, negatives, and the COVID effect

When people get involved in commercial real estate investments, their goal is to increase the property’s value, diversify portfolio holdings, avoid volatility while hedging against inflation, and gain some tax benefits. In short, it’s about making money.

One of the available tools to achieve that goal is leverage. Also known as debt-financing, the idea is that in some cases, assuming debt on a property may be more financially lucrative than bypassing a loan. That being said, there is a time when leverage makes sense and, more importantly, when it does not. 

What is positive leverage?

In the simplest of terms, positive leverage occurs when the cost of borrowing money is less than the return on that property. This results in greater profits for the investor, ROI that can then be used to upgrade the property or diversify into additional properties, especially those that are less risky. 

For example, let’s say a property comes on the market for $3 million. The buyer faces two options:

  • The first is an all-cash purchase, which results in an NOI (net operating income) of $250K. Without a loan, there is no debt service and a cash flow of $250K. The result is a cash on cash percentage (cash flow/cost of property) of 8.3%.
  • The other is to initiate a leverage option with a $2 million loan at 6%. The NOI remains the same at $250K, but this encompasses the debt ($120K) and cash flow ($130K). The cash on cash result is $130K divided by $1 million (the out-of-pocket cost of the property) or 13%. In other words, there is a 4.7% higher return with positive leverage rather than an all-cash purchase.

Depending on economic indicators, leverage may not be in the investor’s best interest, particularly if the cost of borrowing money vastly diminishes the cash return of the investment. The closer the cash-on-cash leverage result comes to the all-cash result, the less wiggle room there is to survive any unanticipated crises, such as immediate repairs to the property or an economic slump. 

Using leverage wisely

When leverage makes sense, some investors can fall into the assumption trap—assuming that if some leverage on a property deal is good, then more property leverage is better. But as the saying goes, never “assume” anything, or you can make an “ass” out of “u” and “me.”

To avoid the potential pitfalls of leverage, investors should wisely consider some key points:

  • The CAP rate should be higher than the Effective Cost of Debt (ECD), which takes into account other costs beyond the interest rate of the loan. These other debts include loan points and pre-payment penalties. Typically, pre-payment penalties occur before year 10 of the loan. If you’re planning on selling the property before that 10-year mark, this is a debt that must be considered before choosing the leverage route.
  • Investors need to have a firm understanding of both short- and long-term plans for their personal financial goals and how those match the best predictions for the economy and the property. For example, can the investor manage the debt stress if the market should turn south, vacancies increase, or the property needs significant repairs or upgrades? Build toward a payment that you can live with should times get difficult in the future.
  • When determining appreciation expectations on the property, lean toward the conservative side. Security is found in a lower expectation and leaves room for good news if the appreciation is higher than anticipated.

Leverage and COVID

Not surprisingly, COVID has left its imprint on leverage. And for guidance, many experts look to the Great Recession. Prior to 2008, a large number of loans were issued at peak property values and with high leverage amounts in the 85% and 90% range. When the bubble burst, investors found themselves in dire straits, with outstanding debt more elevated than the properties’ value. The solution for investors was to de-leverage, look for new, smaller mortgages, or default.

COVID is this and so much more—the fallout from the pandemic has been swift for specific sectors, and the overall impacts for CRE are still accruing and yet to come due. While interest rates are extraordinarily low, investors are also looking at a market that has resulted in higher-than-normal vacancies and tenants re-thinking space needs. And many tenants may not be able to return as Federal-relief loans are expiring in the face of surging cases. Nevertheless, there are two key developments:

  • Leverage can only happen if there are lenders. At the moment, lenders that are currently managing COVID-related defaults aren’t so eager to take risks. And many who anticipate defaults or maintain significant uncertainty about the pandemic are also carefully scrutinizing applications. Thus, leverage financing may be more challenging to acquire, particularly as many of the COVID-relief programs expire.
  • If there’s a clear exception, though, it’s in the warehouse sector—particularly those properties connected to e-commerce, which has grown tremendously during the pandemic. Read this blog on the COVID K-shaped economic recovery and which sectors may be winners and losers in the new normal.

To leverage or not to leverage? Get some CRE assistance in SoFlo

The biggest takeaway is that any decision to use leverage can only be made on a case-by-case basis. Excellent financing, for example, can easily become undone with the purchase of the wrong property or by overlooking current and expected trends and comparable properties. Using leverage properly can only be achieved with sufficient due diligence

For help in exploring your options, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

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