In the 1980s the rock band Asia put out a song called “Heat of the Moment.” It’s a song Spencer Levy chairman of Americas Research and economic adviser for CBRE, has been thinking of a lot lately as his company surveys company heads and commercial real estate professionals about their post-pandemic plans.
Speaking at a Lehigh University online panel discussion on “Market Outlook and Emerging Trends in Commercial Real Estate Amid and Beyond the Pandemic,” he said the answers to survey questions might be influenced by the feelings executives are experiencing because of the COVID-19 pandemic.
“People are answering surveys in the heat of the moment and may answer differently after the apocalypse is over,” Levy said. “The future of the office looks more like the past than anything.”
Ken McCarthy, principal economist for Cushman & Wakefield, agreed that surveys showing that companies are fleeing the cities and that offices will be shuttering might be current sentiment, but will unlikely be the action most companies will take when the dust settles on the pandemic.
“Having lived through 9-11 when we thought no one would want to work on the high stories of a building and that the city was dead did not happen,” McCarthy said. Yes, things did change after 9-11, he said, but many new safety measures were installed into buildings after the terrorist attack, measures that remain today.
Likewise, McCarthy expects changes to the health and safety of buildings being installed now, will simply become part of regular building plans in the future.
McCarthy also thinks that commercial real estate has already hit bottom in the U.S. The worst period for joblessness during the pandemic lasted only about two months. Since then, employment, the economy and gross national product have all begun to rebound. Comparatively, the 2008-2009 recession lasted nearly two years.
“We’re now already in recovery from the pandemic,” he said.
While it took about six-and-a-half years to fully recover the job and commercial real estate losses after the recession, he expects a full recovery in about three to four years. But that doesn’t mean commercial real estate is out of the woods.
Some turbulence ahead
Surabhi Kejriwal, associate vice president and real estate research leader for Deloitte, said surveys show different demographics of workers are looking for different things in the return to normal operations and shifting demand for office space will continue.
“The next few months will be turbulent before the landlord/tenant relationship returns to normal,” she said.
Kejriwal said 2020 has been one of the most interesting years she’s seen on the economy and in commercial real estate. Business closings and offices and other workplaces needing to adapt their space to insure the health of their employees has added to financial losses and added expenses. Companies are spending about 5.8% of their operating budgets to add COVID-19 safety features to their buildings and that is increasing costs, Kejriwal said.
While there has been concern over those expenses and the possibility of lower rents, which has led to growing caution among real estate investors, she said there is still plenty of interest and money available for real estate investment and most think real estate is still a solid investment.
Hotel and retail properties will continue to feel the pressure of the pandemic moving ahead, but industrial properties – particularly those in logistics – will see growth as ecommerce grows and businesses seek to keep inventory closer at hand to avoid the supply chain headaches of the pandemic.
“I think 2021 will be even more monumental than 2020 for commercial real estate,” Kejriwal said.
For now, most people are working from home, said Sarah Dreyer, head of America’s research for Savills, and that she said won’t be changing soon. That likely will mean the short-term stagnation in the commercial real estate industry will continue.
“Those companies that don’t need to make real estate decisions right now aren’t,” Dreyer said. “What leases are happening started off before the pandemic hit.”
Year to date, she said, leasing activity is down 36% from where it was in 2019, and third-quarter activity is off almost 50% off what they were in the third quarter of last year, showing that companies are continuing to hold off on decisions except to shed space they don’t need. Such circumstances have driven subleasing to an all-time high, creating competition that should be making property owners more generous with tenants.
“This is the perfect time for opportunistic tenants to get a good deal,” she said.
While larger cities may take longer to rebound, and less dense markets may become more attractive to companies, people will return to offices, Dreyer said. Collaboration and innovation work better in a gathering space than in a Zoom meeting.
Offices are still relevant
David Seaman, a partner with Price Waterhouse Cooper, said that while working from home will continue, 51% of companies he surveyed said that three years down the road they plan to have more office space than they do now to accommodate their needs.
“Office space is still relevant,” he said.
Retail will hold on as well, he said. Companies like Amazon.com may be the new retail in many ways but bricks and mortar stores still make up 85% of all retail sales.
That doesn’t mean stores won’t still be closing. He said there is still a glut of stores on the market that needs to trim down. “Retail is going to get repurposed,” Seaman said.
But as Loren Keim, panel moderator and owner of Century 21 Keim Realty in Allentown noted, real estate professionals and investors should not shrink from the challenges ahead.
“Any challenge in the marketplace creates opportunity,” Keim said