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Commercial Real Estate Trends

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.

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

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.

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.

Outdoor Space as a Solution to Maximize Building Use During COVID

Taking advantage of available outdoor spaces can make businesses safer for customers and employees while navigating the global pandemic.

We’re learning more every day about the novel coronavirus that’s wreaking havoc on our society, giving us additional insight on how to protect ourselves. 

For example, it’s now common knowledge that the virus spreads person-to-person through close contact, but evidence also suggests that COVID-19 can remain airborne for hours in indoor spaces. It can even travel through HVAC systems. As a result, the longer people stay in an enclosed environment, the greater the potential transmission risk. 

Indoor airborne transmission is causing problems in a variety of industries. Bars, restaurants, and retail establishments are riskier environments for staff and customers, while some office workers also feel unsafe returning to the job site. 

The good news in South Florida is that we’re well-positioned to take advantage of the mild winter weather and can make better use of outdoor spaces than pretty much any other location in the country. 

A vaccine is on the way, but it’ll still be many months before immunity is widespread. Until then, here’s a look at how some businesses and property owners are maximizing their use of outdoor space.

Examples from dining and retail

The restaurant industry is an excellent example of how to use outdoor space to keep a business open. The more fortunate restaurants have patios, and others are developing them, allowing patrons to stay outdoors while enjoying food and drinks. 

One drawback is that patios can get crowded, with tables next to each other allowing for transmission to occur between diners. 

We’re seeing some businesses create proactive solutions to this issue by expanding their outdoor dining spaces. While extending a patio often relies on cities making exceptions or changing their laws, municipalities worldwide are doing just that to encourage a safer environment for restaurant-goers. 

Open-air shopping centers also allow for a safer experience for consumers with fewer restrictions on the number of people who can be in an area at one time. This additional flexibility assists businesses as they attempt to stay afloat during this difficult time. 

New York City is taking the outdoor shopping experience to a new level by allowing retail shops to extend into outdoor spaces. As the holidays approach, as many as 40,000 small businesses could begin using nearby outdoor areas

The weather in South Florida is clearly better than winter in New York, so it makes sense for businesses and commercial property owners to begin exploring the concept of open storefronts to allow shoppers to socially distance. 

Using outdoor office space

It isn’t just retail spaces that can use the outdoors to their advantage in South Florida, as offices can also shift certain meetings and tasks outside

The easiest way to accomplish this is by using courtyards and nearby parks when face-to-face interaction is necessary. This trend isn’t new, either, as 79% of new construction in Manhattan since 2010 features outdoor space

If your building has some outdoor space, like a usable rooftop or a place to build a terrace, property owners can consider renovating to create a brand-new amenity for tenants. Even though COVID-19 likely won’t last forever, the addition of outdoor space can attract renters well into the future.

Making indoor spaces safer

Staying outdoors isn’t always feasible, as there are situations where the weather won’t cooperate or people have sensitive information that they aren’t comfortable discussing in a public setting. There’s also the fact that businesses are paying for these buildings, so they’ll want to use them. 

That’s fair, and there are ways to make interior offices, stores, and restaurants safer for all who visit. Of course, cleaning and sanitizing help reduce the spread of the virus, but what about the air?

Encouraging employees and customers to maintain distance and using physical shields are part of the equation. However, as mentioned earlier, aerosols can linger in the air for hours and spread through HVAC systems.

One solution is to add ultraviolet lights to the interior of the building’s ductwork. In doing so, 99.9% of seasonal viruses will die before circulating through the building, keeping people safer from this type of transmission.  

Morris Southeast Group is on top of the newest retail, dining, and office space trends, ensuring that you can make the necessary adjustments to thrive in the current business landscape. A little flexibility can go a long way, and maximizing outdoor space usage, can be a novel way to attract consumers and tenants while keeping them safer. 
Call us at 954.474.1776 to learn how Morris Southeast Group can assist you. You can also reach out to Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

Technology is Changing Commercial Real Estate—But a Human Advisor Remains Critical

New CRE Technology and the Crucial Role of a Human Advisor

Despite new platforms that aim to shift commercial real estate into a self-serve proposition, true due diligence requires human insight

Technology makes many aspects of residential real estate more accessible, as anyone can go online, select a property, and begin researching. From there, interested parties can schedule tours, check market comps, or even make offers before ever speaking with a person.

Virtual tours make it possible to walk through a property without actually visiting, adding another layer of insight for prospective buyers. The process has become more efficient, and over 44% of home buyers begin their search online.

We’re now seeing similar technology make its way into commercial real estate (CRE), as investors and business owners can evaluate and even purchase or lease assets with minimal human contact.

This has its limitations particular to CRE, however. Online showings and virtual reality tours don’t supply comprehensive market insights or analyze all crucial available data before purchasing. Tech also doesn’t craft a CRE strategy that accounts for a client’s current and prospective needs. This missing information provides immense value—and many buyers will be left without it when shopping exclusively online.

Here are some of the effects technology is having on commercial and residential real estate and where these advances have benefits and limitations.

A look at residential self-serve real estate technology

Online property shopping has become a stable of the residential market, and many websites provide the opportunity to look for a home online. The best known, Zillow, has countless options for home buyers and allows them to get much of the information they require in one place.

At its core, Zillow allows you to search through available residential real estate listings in your area. You can also look at pictures, take virtual tours, and connect with a real estate agent through the platform.

More in-depth features include market reports, housing data, and inventory information, with much of this information presented as easy-to-read graphs. In short, Zillow provides a great deal of knowledge throughout the home-buying process. However, it can’t provide you with real, local insight, such as hidden trends or intangible quality-of-life aspects about a neighborhood; only an excellent real estate agent or more profound research by the buyer can do that.

Redfin, RealScout, Realtor.com, and OpenDoor are similar services that list houses and connect buyers with agents. Most real estate companies and agents have websites with their listings and other information, as well. These websites provide value through the ease with which sellers can list, and the easy access and information they give buyers.

Another innovative residential feature worth mentioning is that OpenDoor and Zillow will buy a seller’s home and then list it on the market. Buyers are purchasing directly from these platforms, in some cases.

Keep in mind that all of these services use local real estate agents and brokers to facilitate the deals. However, in the future, websites like Zillow and OpenDoor will likely begin making more direct sales online, adding an entirely new dynamic to the process.

New options in commercial real estate mirror some aspects of residential tech

Technology’s influence on residential real estate is evident, and it is becoming more prevalent in the commercial real estate world.

The most talked-about new platform is Ten-X. It links brokers, buyers, and sellers in the CRE industry, making it easier for these properties to change hands. This end-to-end platform can already facilitate an entire sales process, and it dominates the market—Ten-X is behind 90% of all online commercial real estate transactions.

There are also auctions on the platform, so sellers or brokers will set a starting bid, and interested parties can attempt to purchase it with the highest offer getting the property.

Currently, brokers are still a huge part of the process at Ten-X, at least when it comes to selling. However, buyers can place bids or agree to make purchases directly through the platform. This technology is sure to alter the CRE landscape even further as it becomes more common.

Why a human CRE expert is still essential

It’s easy to see why investors are considering technology like Ten-X, as it provides a quick look at properties all over the country without having to leave the office. This convenience makes the basics of evaluating commercial real estate more accessible than ever before.

But there is a drawback. Online CRE shopping could lead investors to make snap decisions without considering underlying market conditions and vital data that can make or break a deal’s profitability.

When it comes to finding information relevant to your objectives, there’s no substitute for speaking with a local, human expert on the subject. An algorithm or virtual real estate agent can provide you with data. But figuring out what the numbers really mean—or even knowing which data are crucial for your situation—requires a deeper dive.

The same can be said for commercial tenants, as tech seeks to take on some of the responsibilities of a tenant rep advisor. But no platform will help negotiate a deal, find the exact property to suit a business’s needs, or focus on your interests and understand your situation like an advisor does. And in-depth local knowledge is often the difference between a successful contract and a regretful decision.

Thus, some aspects of this CRE tech trend may leave commercial tenants and investors at a disadvantage.

Morris Southeast Group is excited about this technology and how it will provide CRE clients with greater knowledge and access. And we are already using much of it! But where we—and other highly-qualified advisors—shine is in helping commercial real estate investors and tenants conduct due diligence before signing any agreement.

Our team will gather all relevant data, organize inspections, go over the legal contracts, assess your financial goals to ensure the deal is right, “future-proof” decisions, and quite a bit more. And having a SIOR designee advisor on your side is an immensely valuable asset in many transactions. 

To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. Ken Morris is also available directly at 954.240.4400 or kenmorris@morrissegroup.com.

CRE Opportunities and Pitfalls in a K-Shaped COVID Recovery

K- Recovery
“Silver capital letter K, isolated on white background.”

Solid investments are out there. Finding them depends on assessing the changing demand.

In the rush to predict how an economy crippled by COVID will look, many experts have tossed around the shapes of letters to illustrate how an economic recovery will look. There is the gradual but steady upturn of a U, a V’s immediacy, and the yo-yo effect of a W. 

The newest letter to be added to the alphabet soup is K. While it assumes that everyone starts at the same point, it depicts what has taken shape since the virus reached the United States—different trajectories traveling away from each other. 

K represents the differences between Wall Street and Main Street, people who can work from home and many of those who can’t, and individuals with the liquid assets to survive or thrive in a recession and those without them. 

CRE and the upward K

The K-model can also be applied to commercial real estate, where each sector faces its own unique challenges and opportunities. Some will move upward while others will face a greater struggle during recovery—if they recover at all. 

For example, here are a few sectors seen as winners:

  • Perhaps the strongest sector is warehouses. These facilities were already robust before the pandemic, as the growth of e-commerce required more localized hubs for speedy delivery. But lockdowns plus the public’s reluctance to return to enclosed spaces even after re-opening have resulted in a far greater demand for efficient online delivery services.
  • Data centers have also thrived since the start of the pandemic. In early spring, millions of workers and students learned to work remotely for the first time. That trend remained strong over the summer as surges continued to erupt across the country. With re-opening parameters and continued preventative measures, as well as an erratic positivity rate, many companies and schools across the country will remain remote for months to come. And a portion of this shift is permanent.
  • During the lockdown, grocery stores filled the void of closed restaurants—and continue to do so, as millions of people find it more cost-effective to prepare meals at home or are reluctant to return to dining out.
  • People still need medical care. Despite some practices having to close until they could get preventative protocols in place, and others feeling the pinch as demand for elective procedures dropped, medical office buildings remain open for business. 

CRE and the downward spokes of the K

Sadly, COVID has had a more substantial negative impact on some sectors. These areas look to have a tougher time bouncing back to pre-pandemic levels:

  • Many pundits argue that the pandemic highlighted fundamental weaknesses in our society, from underlying health conditions to wage inequality to a lack of access to quality Wi-Fi. In CRE, perhaps there’s no better example than the venerable mall. For years, these mega shopping centers have battled the growth of e-commerce and the loss of major retail anchors through endless re-inventions, including housing fitness centers, entertainment venues, spas and salons, and restaurants. But all of these tenants have not only suffered under COVID but will have a more difficult time attracting consumers to return to indoor experiences.
  • While the Great Recession introduced the staycation into the American vernacular, COVID made the phrase feel like a life sentence—especially for any facility associated with the travel industry. The cancellation of large-scale events, conferences, and pleasure travel—as well as physical distance mandates—have had a tremendously negative impact on hotels. While the sector is expected to bounce back, the timeline for that rebound depends upon a vaccine and Americans returning to work. Even so, many companies will hesitate to spend on business travel and large conferences like they have in the past.
  • Restaurants and bars are arguably the primary faces of our derailed economy. Deeply impacted by the lockdown and subsequent virus-prevention measures, many owners and operators have fought to survive by increasing take-out services and turning parking lots and streets into outdoor dining spaces. This may continue to work in warmer areas of the country, but cold weather and predictions of a second surge will complicate recovery.
  • Not too long ago, co-work facilities were seen as a hot new wave in CRE. But the pandemic has changed the equation. Until a viable vaccine is created and distributed, the industry will have to convince workers that shared desks and offices are a safe alternative to working from home—and likely make significant property improvements to make these spaces safer. 

Where the two trajectories begin

When looking at the K recovery model, there’s that point where the two trajectories begin their outward journeys. It’s here that some sectors may linger for the foreseeable future before picking a definitive course.

  • The office sector was especially hard hit due to the virus as workers were sent home and doors locked. And many large-footprint office spaces are on a downward trajectory. But the American office should not be discounted, according to economists. Instead, the sector will need time to re-find its place in a world where remote work and physical distance are the norm. This evolution will likely include fewer open floor plans, flexible spaces and work shifts, and smaller footprints.
  • Multifamily property owners quickly felt the COVID pinch in the first months of the pandemic. The lockdown and loss of employment among many residents resulted in missed rents. Although government efforts provided some relief, months of lingering unemployment continued the late- or missed-rent cycles. Some of these losses may ease with the economy’s slow re-opening and the addition of foreclosed homeowners in need of housing.
  • As colleges and universities shut down to opt for online courses and students packed up to quarantine at home during the spring semester, many student housing operators found themselves having to re-negotiate rent agreements. With the fall semester, there was an expectation that student housing would bounce back via campus re-openings. As of this writing, the sector remains a rollercoaster ride as many college students fail to observe social distancing recommendations and requirements. The result has been localized spikes and quarantines, as well as some universities quickly returning to online study.

These examples, of course, are far from exhaustive. The crucial lesson of a K-shaped recovery and its impact on CRE is that different properties will have significantly different trajectories. Investors must closely evaluate an investment’s potential in the new environment.

Finding your place in a K-recovery

More than likely, the economy will recover in phases. And there may be setbacks (depending on a future surge) and lags (especially in sectors that cater to underprivileged socio-economic communities). At the same time, other factors—consumer confidence, virus positivity rate, cost-control efforts from the corporate sector, the arrival of a vaccine, and a Presidential election—are influencing not only the speed and scope of the recovery but also the exact shape of the K. 

As an investor, the reality is that any rebound, regardless of the letter, will take time. Therefore, it’s essential to diligently assess investments and property improvements and choose those that make sense. A regional mall project or an office skyscraper that requires significant capital investment, for example, likely wouldn’t be wise choices.  

For assistance in determining how to proceed with an investment or to find the right property for your needs, please 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.

What is Going to Happen with Rent Payments?

CRE rental payments - Retail space available sign in a commercial real estate building
Commercial retail space available sign.

Commercial real estate landlords are understandably nervous about the future 

The economic impacts of COVID-19 won’t be fully measured for quite some time, but one thing is clear:  many commercial real estate owners aren’t receiving rental payments from tenants. 

Even as communities reopen, numerous restaurants, personal-service providers, and retailers don’t do enough business to pay their bills. Restaurants operating at 25% of capacity, for example, are seeing revenues well below normal, even though they are now technically open for business. In March, industry experts predicted that 2020 would see a loss of up to 75% of independent restaurants in the United States, representing five to seven million lost jobs and $225 billion in revenue. 

Small businesses are unable to pay their bills across the country, leaving commercial real estate landlords to ask, “What about the rent?” 

In the spring, as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, the federal government imposed a moratorium on foreclosures and evictions, keeping both homeowners and small businesses in their properties during the initial shutdown. But that moratorium expired in July. 

In Florida, Governor Ron DeSantis extended the statewide moratorium to September 1st. But that extension only applied to residential tenants who have been “adversely affected by the COVID-19 emergency”—the order did not affect CRE rental payments.

Then, on August 8th, 2020, President Donald Trump signed four executive orders for coronavirus relief, including one that was positioned as preventing evictions. That executive order is widely seen as having no legal teeth, however. It merely recommends that federal agencies consider whether a moratorium on residential evictions is needed—it doesn’t actually prevent evictions of any kind.

And while Florida currently has no statewide order preventing commercial real estate evictions, both Miami-Dade and Broward Counties have enacted some moratoriums

Broward’s “order prohibits the issuance of any writs of possession until normal court operations resume,” and “the sheriff’s office has suspended serving eviction notices during the COVID-19 pandemic.” Miami-Dade has “suspended [police department] enforcement of any eviction orders until the COVID-19 emergency expires.”

Broward County’s order is in place “until further notice,” and Miami-Dade County’s directive is in effect until “expiration of the emergency period”—which was extended on March 18th and remains ongoing.

What does all this mean for CRE rental payments and contracts? 

All rental agreements are contracts, of course. And when contracts lose meaning, much of the foundation of our economy and society unravels. 

Landlords are caught in the middle—between compassion for their tenants and the need to make their own mortgage, insurance, and property tax payments. While almost everyone in the CRE equation understands and empathizes with the unique economic burden COVID-19 has placed on businesses, it’s vital that contracts become enforceable again—and that evictions happen when they are absolutely necessary.

In the meantime, is it fair if landlords lose their investments? And what about tenants who may be experiencing temporary economic hardship? 

The current situation calls for flexibility and a diligent eye on the longer-term implications of each tenant-landlord relationship. Landlords and tenants should keep open communication lines and review leases to see if any necessary accommodations can be reached as the economy reopens. 

Some high-profile tenants are pushing back on terms

Starbucks, for example, has reached out to all of its commercial landlords to renegotiate rental payments. 

“Effective June 1st and for at least a period of 12 consecutive months, Starbucks will require concessions to support modified operations and adjustments to lease terms and base rent structures,” said the letter distributed [in May] signed by Starbucks Chief Operating Officer Roz Brewer. 

Chipotle Mexican Grill and Shake Shack have followed suit. Dunkin’ Donuts, Applebee’s, and Yum Brands, which includes Pizza Hut, KFC, and Taco Bell, are undertaking similar efforts, including tying terms to lease extensions.

It’s not out of the question to expect this trend to continue as various businesses—large and small—operate under government capacity restrictions and other limitations. 

Should landlords forgive or renegotiate CRE rental payments? 

Many landlords hesitate to drop the amount for rental payments to accommodate tenants because “accounting rules still allow them to book income if rent is deferred, as long as it isn’t reduced. Temporary rent forgiveness or discounts would also reduce their property valuations, which could hurt an owner’s ability to get a loan.”

That said, landlords may be able to work out temporary deferments or other measures to keep some income flowing, tenants in business, and property values stable. 

Again, landlords and tenants should keep the lines of communication open. If you are a landlord, tell your tenants not just to go dark and stop paying: “Keep us in the loop so we can help, and let us know what’s going on with your income stream.” Having those numbers will make it easier to approach your commercial lenders with renegotiations or forbearance requests. 

Also, keep in mind: While landlords might work something out with bank lenders and insurance companies, commercial-backed mortgage securities (CMBS) are another matter. CMBS are a type of financing with no single “entity”—investors pull together into a security instrument, so there is no one to speak with about renegotiating terms.

Thus, if you have CMBS financing, tenants stop paying, and you can’t pay, there’s little you can do. The moment you are late with a payment, the financing goes into special servicing, and the property is in immediate jeopardy. 

This creates a unique problem for CRE investors with this type of financing—and getting overdue rent payments or being able to evict non-paying tenants becomes even more critical. 

Keeping an eye on the CRE situation

The pandemic continues to contribute to disrupted business and high unemployment, which snowballs into even lower business revenues, among other consequences. All of these factors are affecting the ability of many commercial real estate tenants to pay their rent. The federal government is still working on a follow-up to the CARES Act that may provide some relief, but government assistance can only do so much. And it’s essential for CRE investors to closely monitor the national and local economic outlooks and stay adaptable.

In these most uncertain of times, a trusted advisor and property manager can be a valuable resource. At Morris Southeast Group, we’re closely watching how all of this plays out, and we’ll be sure to keep our readers and clients informed as the situation changes. 

If you have questions about CRE investing strategies, property leasing needs, or property management services, call us 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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