Americans are likely to see more “for rent” signs in the coming months as many businesses devastated by COVID-19 abandon offices and storefronts.
The pandemic has affected the way people use and interact in public space and likely will have lasting impacts on commercial real estate. The coronavirus is now a global phenomenon with two thirds of the world’s population living under some sort of lockdown or quarantine. People can no longer work, meet, eat, shop, and socialize as they used to. The working world quickly transformed from business as usual into office closures, work-from-home mandates, and production stalls. “Coronavirus could restructure America’s commercial real estate and industry,” said Clement Ziroli Jr.
While commercial properties tend to generate high returns, residential real estate properties are known to be much safer investments during a pandemic. While businesses are shutting down, people will always need places to live. So it’s unlikely that the COVID-19 pandemic will have long-lasting effects on the demand for the residential real estate sector. Landlords of single-family homes and small multi-family homes can expect to make rental income. Plus, there are still motivated sellers on the market in 2020.
Clem Ziroli Jr., who served on the Board of Directors of the California Mortgage Banking Association (CMBA) and the Community Home Lenders Association (CHLA), believes that we’re seeing the first signs of stress in the industry as clients are seeking to move out of office spaces they can no longer afford and the number of accounts receivable ticks up.
In early August, news broke that Simon Property Group—the largest owner and operator of malls in the US—was in talks with Amazon, with the objective of repurposing some of the space formerly occupied by beleaguered retail tenants into distribution and fulfillment centers. Amazon had already been converting some sites of “failed malls” in Northeastern Ohio into fulfillment centers. The e-commerce giant continues to perform well amid the COVID-19 crisis, doubling its profits year-over-year to $5.2 billion in the second quarter despite the worst economic contraction ever experienced by the US.
The question begged is what happens next. While some may look to muscle their way into distressed assets, it’s very possible the commercial real estate market will never look the same. This pandemic is something we’ve never experienced before,” notes Clement Ziroli.
“The commercial real estate industry has really been under the radar during this 2020 corona-stricken year, but it’s hurting badly,” Pac W. Dong says. Demand for office space has tumbled. Last quarter, office leasing was at its lowest point since the Great Recession. With that in mind, some developers and financiers are taking a step back from building more office space.“The pandemic really accelerated a trend toward online shopping and away from in-person shopping,” said Clement Ziroli Jr., acquisitions and leasing specialist. Public concern about the virus might cause some businesses such as movie theaters and malls to experience decreased traffic for weeks or months after reopening. When shopping and travel begin to stabilize, it will be clearer what commercial properties are worth. It will be interesting to see how real estate reacts in a second COVID wave that many believe has already started. “It will bounce back as soon as the world normalizes, but not as quickly as some optimists say,” Pac W. Dong said.