How Commercial Real Estate Changed Due to the Pandemic
Written by: Alan Nochumson
The effect that the COVID-19 pandemic has had on commercial real estate differs from the financial crisis of the aughts. While the earlier financial crisis was a credit and liquidity crisis, the pandemic has directly impacted the demand for space through quarantines, social distancing, shutdowns, supply chain disruptions, employment loss, and a shattering of consumer confidence. The pandemic has forced the commercial real estate market into a series of seismic shifts, accelerating some trends while bringing others to a standstill. Prior to the pandemic, the market was trending in the direction of shared workspaces and community amenities in apartment buildings. Those ideas look much different in a world where social distancing is a health imperative. With the future habits of consumers still uncertain and companies still unsure how much of their workforce will remain working from home after we return to ‘normalcy’, the outlook for commercial real estate stays in a state of flux. In this blog, we look at some of the ways that commercial real estate has changed due to the pandemic.
Landlords vs. Tenants: Who Should Pay and How Much?
The pandemic certainly turned the world of brick-and-mortar retail upside down. While businesses that provide essential goods, such as groceries and pharmaceuticals, remained open and for the most part profitable, businesses with products and services that could be delivered online or at home suffered, if not altogether closed. The crisis forced many businesses to reevaluate their real estate footprints, sparking growing tension between landlords. Some landlords decided to take the matter to court as part of attempts to recoup unpaid rent while some tenants sued over landlord’s unwillingness to renegotiate terms. Between the struggling landlords and retailers fighting to protect their businesses in the face of massive drops in business, more lawsuits are sure to follow. The pandemic is likely to lead to new lease language in the future and for certain business owners, questions about how much investment in a physical footprint makes sense.
Working from Home vs. In the Office
With so many employers requiring their employees to work from home due to the pandemic, the question remains how much of the workforce will return to the traditional office setting in the future. Even for companies that prefer the traditional office environment, with all of their employees coming into the office daily, provisions will likely need to be made going forward. Those employers who insist on employees working in the office will need to provide an environment that feels safe. The need for more space to keep everyone adequately distanced may be a feature that lasts indefinitely. For other businesses, downsizing their office spaces becomes necessary if most of their workforce is working from home. Either way, changes will be necessary and those in commercial real estate will need to adapt to these changes.
On the Bright Side…
The undisputed brightest side in terms of commercial real estate over the course of the pandemic was found within the industrial sector. Given the increase in online shopping, retail-to-industrial conversion projects likely will accelerate in 2021. There is strong demand for infill warehouse space in urban cores, but land constraints and high costs have limited new development. Adaptive reuse of retail buildings for industrial occupiers is expected to accelerate in 2021. New industrial completions are expected to jump up to 30%, with demand expected to keep pace with new supply.
Alan Nochumson recently profiled in an article from Above the Law, a news and insights publication about the profession’s most colorful personalities and powerful institutions, as well as original commentary on breaking legal developments. He mentioned that despite the pandemic, he has not seen a precipitous drop-off in new leasing activity. In fact, a lot of our clients are moving ahead, arranging the components of their deals before business activity resumes to normal.
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