Housing Market Predictions

The Pandemic May Lower Commercial Real Estate Values for Years

One of the most impacted sectors during the shutdowns in the United States has been commercial real estate or CRE.

As we try to move toward a post-pandemic world it’s no secret almost every sector of our lives has been impacted.

From the way we work – remotely– to the way we visit a grocery store – wearing masks – to how we interact with one another – social distancing – life has changed.

One of the most impacted sectors during the shutdowns in the United States has been commercial real estate or CRE.

As employees continue to work from home and stores only allow a certain percentage through their doors, commercial real estate may not return to normal for years.

From large cities to the deserts and beyond, CRE estate buildings remain empty and have for lease signs plastered on their windows.

Even experts say the commercial real estate market remains weak compared to what it was like before COVID-19.

According to the National Association of REALTORS commercial members who responded to the 2021 Q1 Commercial Real Estate Quarterly Market Survey and industry data, it will be some time before the industry gains traction again.

“Acquisitions for large commercial real estate ― properties or portfolios of at least $2.5 million ― fell 28% year-over-year in the first quarter of 2021, with transactions declining across all property types, except for hotel acquisitions. Investors could be acquiring hotels to convert into other uses such as multifamily housing,” the report says.

Among commercial members of NAR who participated in the survey and whose acquisitions were typically properties or portfolios of less than $2.5 million, transactions declined by an average of 1%.

Respondents reported an increase in sales of land and industrial properties and a drop in sales of other types of commercial real estate, too.

Currently, CRE prices remain iffy, and the value of commercial real estate is still broadly down by 6% compared to one year ago, according to NAR.

Also, a majority of NAR commercial members who answered the survey―70% ― said companies are leasing or moving into offices with smaller space due to workers working from home.

Another report from Deloitte, “Covid-19 implications for commercial real estate” authored by Jim Barry suggests, unlike the 2008 economic downturn, the “CRE industry was in a better place before the start of COVID-19.”

The article adds in its 2020 commercial real estate outlook, based on a summer 2019 global survey of 750 CRE C-suite executives, three-fourths of those answering expected capital availability to rise in 2020.

Since the second week of March 2020, when COVID-19 was declared a pandemic, spreading globally and across the United States, financial markets have been up and down.

Additionally, the CRE industry was affected immediately mostly because trade activities and occupiers’ businesses were shuttered fast.

Today’s CRE Market

How is the pandemic impacting tenants’ businesses now? The evolving economic situation has had a big influence on property owners, brokers, developers, and proptechs, according to the Barry article.

Here is a breakdown of the impact on CRE subsectors, the article adds:

 Real Estate Investment Trusts

“With REITs, there have been varied impacts across property types based on the pandemic’s influence on tenant businesses. As of April 15, the Data Center REITs index was up 34 percent year on year, while retail and hotel REIT indices were down 48 percent and 53 percent, respectively. Overall, the immediate leasing risk is softened for REITs because they have long-term lease contracts. However, leases associated with the most impacted segments have immediately felt pressure because tenant businesses and liquidity have been affected. In addition to base rents, percentage rents, which are calculated as a proportion of sales volume, are significantly impacted by business shutdowns.”

As buyers and sellers take a let’s-see-what-happens attitude and CRE deals are delayed, most brokers are still feeling the effects. Looking at properties across the board has slowed in the current environment.

Developers and Homebuilders

The Barry article adds that numerous developers’ project timelines and cash flows are affected because of the snails’ pace activity and halts in some forms of construction, including new developments.

A recent contractor survey found more than one-half of US construction firm respondents stopped or suspended projects. More than two-thirds experienced delays because of materials and personal protective equipment shortages.

Project sites that are still active must still follow COVID-19 guidelines such as social distancing and frequent cleansing of common areas and construction equipment.

Overall, and 18 months later, the way we work now because of COID-19 has required mass remote working and lifestyle changes ==it’s anyone’s guess as to what the new normal will be for all as well as the CRE sector.

“These converging factors, which may prevail over a sustained period, will likely continue to influence occupiers and end-users of real estate in unprecedented and unique ways, which is expected to have implications for the CRE industry,” the Barry article surmised.

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