The residential real estate market has undergone significant changes because of the pandemic, and commercial real estate, from office buildings to retail locations, is also seeing a shift in trends.
Many since March have deserted commercial real estate locations due to a need for social distancing. While some of these places might find themselves returning to normal eventually, other types of commercial real estate could be altered permanently.
“I think in retail you’re going to see some people not reopen,” said Lawrence Colorito, chairman of Valbridge Property Advisors and an adjunct professor of real estate at Old Dominion University. “For whatever reason, whether a restaurant that couldn’t wait or a retailer whose business got really hammered because of the pandemic, what happens is you have a permanent vacancy as opposed to temporary and then you can’t collect rent on that property.”
Colorito said the hardest hit commercial real estate locations were in the hospitality industry, such as hotels, that are now trying to re-imagine their business. For the time being, some hotels are offering their rooms as remote working offices when people need to get away from their homes. But for the most part many are still struggling with the lack of travelers.
Gerald Divaris, chairman and CEO of Divaris Real Estate, said those trends are only temporary — people are eager to get back to normal life with restaurants and entertainment so as restrictions are lifted and people feel more comfortable, then those commercial businesses will see an increase in customers.
“I think the minute people get used to the fact that they have to use some social distancing and there’s a vaccine, those people will return to businesses,” Divaris said.
What has been hit especially hard during the pandemic are certain retail locations, he added.
“Clearly, the one that’s most evidently impacted are enclosed regional malls,” Divaris said. “The largest cause of their demise has been the fact that department stores have really taken a hard hit, and not really directly related to [the coronavirus], it started before as they struggled to find relevance in a market that was changing to online shopping.”
Many of those large anchor stores in malls, such as Sears, are struggling as people look to online or outdoor shopping areas. Divaris said as those spaces in malls continue to struggle, eventually they will have to be repurposed for other uses if the businesses cannot hold.
“So, adaptation isn’t new,” Divaris said. “It’ll be expedited, I think, and we’ll start finding a lot of other users interested in leasing those big spaces.”
He said businesses such as medical facilities and schools typically are interested in leasing those repurposed retail spaces.
Other types of retailers such as Target or Walmart continue to thrive in a difficult market because of their presentation and their positioning outside of malls, typically.
It’s even more unclear what trends will come out of this pandemic in the office sector of commercial real estate.
Colorito said some office buildings might struggle because businesses could have a more difficult time paying rent in an uncertain economy. A more significant factor that could change the market is that many businesses are having employees work from home more than ever.
“In the long run, businesses may need to look at their space needs and with a significant number of staff working from home, they might realize they don’t need that space,” Colorito said. “On the other hand, there might be a need for greater space because people want to return to the office but be more socially distant.”
Colorito said there is a possibility some offices will eventually return to working the way they were before the pandemic.
Divaris is confident that will be the case.
“I have no doubt that people aren’t as effective working from home than in an office setting,” Divaris said. “Ultimately the need for increased productivity will bring them back into the office.”
Divaris said productivity has decreased because when people are in an office together, they’re able to collaborate and innovate together. So while it might seem cheaper to have employees work from home, it’s more beneficial to a company to have a singular collective workspace.
Both Divaris and Colorito said it’s difficult to determine some of those trends because commercial leases usually are long term, lasting five to 10 years. If businesses and offices start changing how they operate in a space, those effects won’t be felt for years after which a vaccine for the virus could have been distributed.
“I do think we are all going through this unusual time and unfortunately there’s been a lot of fear-mongering done in the name of [the coronavirus],” Divaris said. “But fundamentally we are social beings and work through collaboration. In most ways, we will return to these spaces.”
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