Speed of Recovery in CRE Depends on Location and Sector

May 21, 2020
Author: Glenn Hunter

With its involvement in virtually every business sector, commercial real estate has been uniquely impacted by the coronavirus pandemic. Stay-at-home orders caused by COVID-19 slammed the brakes on a solid U.S. economy: shuttering stores, emptying out office buildings and idling consumers. Previously thriving, with solid fundamentals and strong balance sheets, the commercial real estate (CRE) industry watched the virus wreak havoc on its returns and the value of many of its assets.

The rebound of commercial real estate depends on the industry and location.

Now, as states have gradually begun the process of reopening, CRE is playing a central role in helping tenants return to their physical spaces in a much-altered landscape. At the same time, the industry is adjusting to a new environment that has seen the densest properties – healthcare facilities, shopping malls, hotels – hit very hard, while others – like data centers and industrial projects – fared better.

CRE firms also are negotiating new lease agreements, especially at office and retail properties, as recession-battered tenants ask for and receive rent concessions and abatements. Going forward, performance analytics revealing current metro and industry status and economic-growth forecasts, as provided by LaborIQ® by ThinkWhy, will help CRE companies navigate the post-pandemic landscape for each property type.

Office. Look for a fresh focus in this sector on physical distancing, workplace safety and tenant health. While the teleworking trend could lead to reduced office demand and an increase in sublease space, there’s most likely to be more office space per square foot per person – reversing a years-long trend – as well as more demand for large, collaborative meeting areas. Jobs data, especially for the Professional and Business Services sector, will tell CRE pros where office growth is apt to be strongest.

Retail. Sales have plummeted, many smaller restaurants are expecting to close, big retail chains have failed to pay their rents and others have filed for bankruptcy protection. So the medium-term shakeout in this sector could be dramatic, with Class C malls especially at risk. The good news is that online sales are robust and growing fast – a trend that has many retailers reassessing their existing store networks. Metro data, including employment trends in the Trade, Transportation and Utilities supersector, will indicate those markets recovering fastest.

Industrial. The move toward e-commerce is boosting demand for warehouse-type properties, which were booming even before the pandemic began. FedEx, for example, just leased 750,000 square feet of new space in Dallas, part of the company’s nationwide expansion plan. Data by MSA, as well as by jobs in the Manufacturing sector, will be helpful figuring out the trajectory of growth in industrial properties.

Multifamily. This sector is often considered most resilient to the pandemic. But that could change if high unemployment persists and stifles demand, especially for lower-end properties. Overall rent collections, however, have been better than expected. According to the National Multifamily Housing Council’s Rent Payment Tracker, 87.7% of tenants made full or partial payments by May 13, down just 2.1% from the share paid a year earlier. Data showing the fastest-growing job markets, broken down by salary and industry, will foretell which multifamily segments will bounce back first.

Hospitality. A slowdown in both business and leisure travel will hobble hotels, crimping new construction. Look for a shift toward more convenient, drive-to resort locations and to properties located in less-dense markets. Employment data for the Leisure and Hospitality supersector will be key to understanding the breadth of the shakeout.

Long-term Prospects Are Solid

As always, the location of various commercial properties will be critical, as the pace of recovery from the pandemic will differ from metro to metro. For example, LaborIQ by ThinkWhy forecasts that properties in MSAs where Leisure and Hospitality jobs dominate, like Las Vegas and Southern and Central Florida, will be at highest risk during the recovery. So will those located in fiscally troubled, densely populated metros like Chicago.

In contrast, properties in cities like Washington, D.C.; Boston; the San Francisco Bay Area and Seattle are apt to do much better. These are metros with well-educated, well-paid, white-collar workforces and a heavy focus on technology, which has come through the pandemic relatively unscathed. There’s also a good recovery case to be made for smaller MSAs with lower population densities such as Salt Lake City; Madison, Wisconsin; and Durham, North Carolina.

While it’s a safe bet there will be less demand for some types of space after the recovery, the long-term prospects for commercial real estate are solid. The industry can ensure a bright outlook by remaining adaptable, offering tenants its best advice during the transition, developing its own smart business continuity plans and stepping up its use of advanced analytics to attract new clients and drive growth.

ThinkWhy continuously monitors and forecasts industries and MSAs to measure the impact on the labor market. Stay current with us. We are here to support organizations and provide insights during the economic downturn as well as the recovery phase.