As we enter a new calendar year, the pandemic will continue to affect real estate in several ways. The primary thesis is that for some real estate sectors the pandemic was only a temporary disruption, while for others it accelerated pre-existing conditions. But even within these premises there are sectors that have been negatively impacted but will recover (hotels and sports arenas), those that have benefited in the short term (resorts within driving distance and cold stores for vaccines), those that will benefit in the long term (E. -Commerce fulfillment centers and cellular infrastructure) and others brand new as a result of this crisis (regional kitchens for food delivery and expanded areas for roadside retail pick-up).
Below are some current and potential future trends that we should all consider as we navigate the upside-down world of commercial real estate.
The overriding question in the office space is what the balance will be between needing more space for staff separation and wanting to be downsized due to work from home. In addition, Open Office layouts may still exist, but may have less shared workspaces. Some larger tenants may even consider leases for better control of their own surroundings. In addition, businesses may be more attracted to single-story “Tech Flex” buildings that have no common areas and only separate rooms with private lobbies and toilets.
It will also be interesting to see how much corporate real estate managers focus on having their air filtration systems modernized by the landlord. Most employees may become less aware of what is “out of sight” over time as they focus more on front and center elements like non-contact technology.
The debate is also only just beginning when it comes to employees who want to work from home. A recent study by Cushman & Wakefield found that fewer than 10 percent of employees wanted to work from home permanently, while a third of employees said they were home one or two days a week. However, one more question could shed some light: How much time would you like to be at home if all your colleagues are still working full-time in the office? No doubt many would change their minds (fear of missing out) because of FOMO.
Another important aspect of working from home is the nature of the work. The “processing” (e.g. software engineering or mortgage documentation) can be done more easily away from the office, while the “production work” (marketing, finance, etc.) requires more teamwork on site.
A recent group of CEOs listed the reasons they want their workforce back in the office: innovation and culture; improved talent attraction and retention; Brand support; Protection of intellectual capital; and of course more socialization and productivity.
Finally, companies that decide to move from downtown to the suburbs can highlight the new locations with city-like “walkability” near restaurants and entertainment.
Single family homes
The above-expected level of home sales was one of the most surprising positive outcomes of the pandemic. The importance of selling new homes cannot be overstated as each new home provides an average of three “year-long” jobs. Contributing to this trend are: 1) interest rates at historic lows, 2) the home buyer population is less affected by this blue collar recession, 3) people are buying first and second homes to escape urban life, 4) the demographic peak of the millennium is approaching the age of home buying, and 5) as economist Peter Linneman recently noted, there are many “unintended savings” from missing out on dining out and missed vacations, etc. These funds can now be used to deposit buy all these new houses.
Additionally, the impact of the pandemic will encourage new homes to add more space for offices, be Wi-Fi certified, and potentially have areas for the owner’s parents who are more likely to age in place.
The retailers with the pre-existing conditions are hardest hit. The survivors will be the retailers who offer goods and services that are consumed locally. Examples are restaurants, fitness studios, entertainment venues and even medical practices (“Medtail”). Apparel will continue to be challenged, but not out of date, as most retailers know that it is difficult to be successful without a physical presence.
An ongoing trend in brick and mortar stores is to provide additional online pickup locations for orders. This has already spread to restaurants as people get used to picking up groceries once or twice a week to eat at home. Certain large retail property owners may even follow Simon Properties’ strategy of owning retail stores, not just leasing them. Simon Properties has bought Aeropostale, Brooks Brothers, Lucky Brand and JC Penney.
After all, retail is not going to die completely; In fact, every region will continue to have at least one closed mall as people still sometimes want the experience of physical shopping.
Hotels offer the best definition of “disturbed”. Travel will of course return, but there may be a long-term loss of momentum as businesses become more used to Zoom calls rather than face-to-face meetings. As a result, there may be an erosion of the small meeting business as the groups still meet, but possibly less in person. Major conventions cannot simply be replicated virtually and should return to near pre-pandemic levels. Business and leisure travel will be slow to return until there is confidence in the entire travel experience. Even if guests are satisfied with a hotel and its cleanliness, they may still hesitate to travel if they feel uncomfortable on airports, airplanes, and motorway service stations.
The back and forth with travel restrictions also made planning difficult. In fact, most hotels have a “tight booking window” that sometimes only lasts a day or two. This is primarily because, despite knowing the full cancellation policy, customers are still unsure whether future downtimes are possible and they know that there will always be “room in the inn” during this crisis.
The hotels that have seen some success amid the pandemic are the leisure resorts that are just a few minutes’ drive from major markets. Branded hotels have also been able to instill more confidence in cleaning standards, but again this is nowhere near enough to avoid financial challenges.
Big city hotels remain the biggest challenges as they lack international business and group business and many travelers want to avoid the urban density. Suburban hotels with limited service have an advantage over full-service hotels, as guests are more comfortable with the smaller lobbies, fewer elevators, and less perceived interaction with other customers.
Eventually, many hotels will switch to self-automated kiosks and text communication with their guests, especially scheduling appointments at the gym and notifying guests when tables are opened in the restaurant.
Sales and logistics companies reduce their supply chain risks by using strategies such as “China Plus One” to make them more domestic or at least more redundant. In addition, they create more leeway in their existing systems by providing additional inventory and thus less “just in time” and more “just in case”. This redundancy should create additional demand for industrial real estate.
With the partial departure from China, manufacturers west of Singapore could use the Suez Canal more frequently and thus now enter via the east coast, which could lead to a possible partial departure from the traditional west coast markets.
Since e-commerce includes a greater variety of items and less large packaging, it can require up to three times as much space as conventional warehouses for the same sales volume. With customers demanding faster deliveries, retailers could use more air freight, which would benefit industrial companies near regional airports. The “last mile” facilities also expand their land requirements to accommodate the new battery of individual delivery vehicles and parking spaces for their expanded “pick and pack” employees. In the past, industrial users were mostly located outside of cities and near major highways. Now distribution centers are moving closer to “rooftops,” ironically exactly what retailers wanted 50 years ago. Given the higher price of land near cities, developers could try to increase the ceiling heights of their buildings further, which could one day result in rents being calculated based on cubic meters rather than square footage. There may also be a trend towards “storage rooms”, smaller warehouses close to private customers.
Another transformation can take place through the combination of sales and retail locations. Retailers could adjust their building mix seasonally by having each store either as a full showroom, a partial showroom with shipping in the background, or as a further operation as just a warehouse replenishing the other stores’ inventory and / or the retailer’s e-commerce orders met, reassign within the region.
Finally, the industrial sector is strong, but there are still challenges with older industrial buildings with small parking spaces, whose tenant base may be facing financial challenges. In addition, highway, rail and airport infrastructures are very important to this sector and without government dollars from future stimulus packages, the supply chain and subsequent growth of the industrial sector could be negatively impacted.