The COVID-19 pandemic—and its impact on businesses over the year ahead—is the leading concern among commercial real estate executives, according to The Counselors of Real Estate.
The Counselors, a commercial trade group for CRE designees, surveyed its members to identify current and emerging trends in the commercial sector for its annual list of issues affecting real estate for 2020–2021.
“The change wrought by the COVID-19 crisis and its aftermath will teach us about priorities, resilience, and demand in ways that we did not dare test before,” says Michel Couillard, 2020 global chair of The Counselors of Real Estate. “In examining real estate markets, we must consider existing fragility, adaptability to new demands, and potential relevance to new markets. Demand will be defined by the extent to which this crisis leads us to abandon old habits and adopt new ones. The duration of the lockdown has been a factor, and so is the confidence with which we emerge.”
Here are the 10 issues that will likely shape the commercial sector over the coming year:
The full impact on the real estate market is still unknown, but the pandemic will undoubtedly reshape the commercial sector in several ways. For example, the report notes that the demand for office space may decrease if remote work continues to increase. On the other hand, there could be an increased demand for larger spaces to reduce density in businesses and public places such as airports, restaurants, banks, and some offices as people continue to social distance.
2. Economic Renewal
“The challenges facing the economy and the real estate industry are deep and persistent, with leisure and hospitality, retail, construction, and air travel seeing slow and partial rebounds into 2022,” Couillard says. The impact of the economic lockdown on state and local tax revenues could reduce non-federal government employment levels and delay infrastructure projects.
3. Capital Market Risk
The last four months have presented a lot of volatility in the capital markets, but it also has confirmed how quickly debt and equity capital liquidity can stop flowing when risk and returns are difficult to measure, the report cautions. “One thing we have seen since March is that volatility has spiked, which makes pricing debt more challenging,” Couillard says. “Federal intervention helped to limit a complete seizing of the markets, but doesn’t necessarily mitigate the longer-term concern about defaults and losses. While pricing stability and liquidity appear to have somewhat returned, late payments and loan defaults have seen a significant increase.”
4. Public and Private Indebtedness
Commercial real estate can be greatly affected by local indebtedness funded by local taxes. The U.S. national debt has increased to more than $26 trillion in just six months. Total state debt is about $1.2 trillion, and local debt is nearly double state indebtedness at $2.1 trillion. The level of debt brought on by the pandemic—“with trillions more ahead in stimulus and fiscal rescue intervention—is not sustainable,” the report notes. “It will impact commercial real estate in many ways, from reduced demand for housing to interest rates that will eventually have to rise to attract new capital to fund our debt, to the ability to repair and upgrade our aging infrastructure and fund projects like 5G that will be essential to our future and U.S. competitiveness.”
5. Affordable Housing
There is a shortage of more than 7.2 million affordable rental homes for extremely low-income renter households (those with incomes at or below the poverty line), according to the National Low-Income Housing Coalition. Further, there is a shortage of affordable for-sale homes. CRE notes several solutions, such as expanding taxpayer-funded, one-time front-end subsidy programs for affordable housing, using the power of zoning to create subsidies to support it, and finding ways to circumvent “not in my back yard” opposition.
6. Flow of People
Reduced migration and COVID-19 behavioral changes could impact demand for residential, hospitality, and retail real estate. “The flow of people between and within countries has always been a critical driver of real estate and the economy,” the report notes. “Today, the world’s economies and people face unprecedented challenges to mobility.” Reports of urbanites fleeing the city due to concerns over the virus are growing. As such, companies may seek expansion in suburban areas to reduce mass transit reliance.
7. Space Utilization
The pandemic will likely have a lasting impact on the design and use of real estate space. “COVID-19 has stressed the use, location, mechanical infrastructure, and interior configuration of commercial buildings,” the report notes. A new focus is being placed on the health of workers, factoring in from the building entry to the indoor air quality, the report notes. “Acceleration of planned, medium-density, mixed-use communities will replace old retail formats, with design that embraces walkability and integration of uses that enable continued normalcy in case of subsequent lockdown orders,” the report notes.
8. Technology and Workflow
“The combination of migration back to the office, the need for reconfiguration and change in operating methods, and the general desire for working remotely are accelerating the adoption of technology in the built environment,” the report notes. Technologies will grow as essential, such as tracking people in buildings, contactless doors and elevators, air and water quality monitoring, airflow and recirculation control, mandatory remote building services, and health screenings for contractors and facility staff.
Infrastructure needs are now being reassessed under a new lens. But funding will remain tight and is estimated to be underinvested by $15 trillion in global infrastructure by 2040. “Basic infrastructure needs will go unmet and potentially impact real estate values and development patterns as underserved locations become less livable and even undevelopable,” the report notes. Retailers are increasingly relying on online sales to drive revenues, and warehouse and distribution facilities will remain important to supporting their businesses.
10. Environment, Social, and Governance
This is a critical component of real estate investment, from looking to counter the risks of climate change to identifying ESG investment alternatives, the report notes. “While COVID-19 has underscored the importance of ESG issues, the new ‘norm’ is a result of trends already underway, including dramatically changing acceptance of the risks of climate change, innovations in the measurement and tracking of ESG performance, new innovative ESG investment alternatives, the growing influence of millennial investors, and substantial recognition of ESG initiatives from corporations,” The Counselors’ report notes.