As businesses prepare for a gradual reopening of the economy, many will need to adjust to a “new normal” amid the novel coronavirus pandemic, experts say.
New Orleans-area real estate professionals say traditional commercial spaces such as office, retail and industrial uses face a murky future.
Cres Gardner, vice president of the local office of commercial real estate firm Beau Box, said he could see some office tenants adding space to spread out employees over a larger area. Many companies have changed their workplace configurations in recent years to more of an open floor plan to promote collaboration among employees. Gardner said these could be redesigned for more private offices.
Office leases, which average around five to 15 years, could be renegotiated as tenants seek shorter leases for added flexibility and to be more cautious, he said.
A clause that’s normally built into lease contracts is force majeure, meaning it frees both parties from liability or obligation when an “act of God,” such as a natural disaster or other extraordinary event, prevents the business from operating and paying its rent.
That might not affect the downtown New Orleans office market as much. Gardner said most of the office buildings in the Central Business District have remained open during the pandemic.
“These are all things that are being discussed,” he said.
Commercial broker Robert Hand, president of Louisiana Commercial Realty, said all new leases will need to mention mandatory closings by the government due to a health concern or something else that forces a business to close as a contingency if a firm cannot pay its rent. Hand said he has seen landlords waive the rent for their tenants during this time but have tacked it on to the back end of the lease.
Traditional shopping malls and big box retailers were already in trouble before the pandemic. While high-end and niche retailers are expected to rebound, Gardner thinks the more traditional forms of retail will continue to struggle.
Some of these larger retailers will either be converted or razed and repurposed for industrial use, Gardner said. According to multiple reports, online retail giant Amazon is reportedly in the process of finalizing purchase agreements with several owners of individual spaces at the former Cortana Mall in Baton Rouge. Plans are to demolish the 1 million-square-foot shopping mall and replace it with a distribution and fulfillment center.
The restaurant and service industry and other small businesses could have a tougher time if they don’t adapt to the new landscape.
Hand said convenience will be a determining factor for businesses in this sector to survive. He envisions that most “mom-and-pop” businesses will someday have either an app or a way for customers to order their products online and pick them up via curbside delivery. Once customers become accustomed to this, he said, the model is likely to stay put.
“There’s a new industry out there for app and website developers to make it easy for people to do this,” he said. “There’s a lot of pent-up demand for people who want that convenience.”
Restaurants will need to find other ways to do business to make ends meet by offering more delivery or takeout options. Places that offer indoor dining that could normally hold 100 patrons will now be able to serve only 25 customers under the first phase of reopening the economy, so these establishments will have to adjust their prices to reflect that.
Restaurants that are name brands in New Orleans, such as Galatoire’s or Emeril’s cadre of restaurants, will be able to weather the storm, Hand said. Others that he terms “commodity” businesses will go under because their best offering is inexpensive prices, he said.
“This is going to force businesses to compete on service rather than price,” he said.
According to financial news website MarketWatch, all three of the flexible real estate models that have seen substantial growth in the past few years are likely to take a dramatic downturn. These include:
- The co-working industry – Many of these operators, such as industry leader WeWork, have seen demand evaporate for its services because of health-related concerns. It is unclear how this trend has affected the New Orleans-area market.
- The co-living niche – This concept typically gives each renter his or her own private suite with a bedroom and full bathroom, and the suites share a common area with kitchen, living and dining areas. The industry could suffer a rough patch because of the prospect of close living arrangements. New Orleans developer Marcel Wisznia wants to build the city’s first co-living space, a $44 million co-living development dubbed “Two Saints” at the corner of St. Charles Ave. and St. Joseph St.
- Short-term rentals – These operators have been affected by a sharp decline in travel. Many properties that were once used in this capacity have now been put on the market either for sale or for longer-term leases.
“In the new world we’re entering, the well-capitalized will be the beneficiaries of the new opportunities,” Ariel Maidansky, CEO and co-founder of online interior design and furnishings firm Envizzo, in a Marketwatch opinion piece. “Commercial real estate owners should be in a strong position to acquire some of these short-term rental and other operators for a bargain. Valuations are likely to take a big hit, meaning there will be some very good deals out there.”