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

March 31, 2021

suburban office park

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

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

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

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

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

Multifamily properties in the suburbs

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

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

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

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

Suburban offices

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

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

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

Amenities in the office

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

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

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

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

Will a vaccine change things?

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

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

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

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

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

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