Focus on Finance: Commercial Real Estate – Looking forward post COVID-19

By David Wallach and Riley Lyster

(AJNews) – 2020 was a year like none other as we all faced adversity throughout these unprecedented times. Commercial real estate was especially hit hard, with record vacancies due to mass layoffs, and work-from-home orders. However, the night is always darkest before dawn, and as we turn the corner and look forward to 2021, we potentially see the end of the COVID-19 pandemic in sight due to the distribution of multiple vaccines. It begs the question: How will the commercial real estate industry be affected by the pandemic moving forward?

The commercial real estate (“CRE”) industry will naturally bounce back at varying rates as economies around the globe are slowly but surely reopened to the point at which they were pre-pandemic. The subsectors of real estate will also bounce back at different levels as COVID accelerated some trends, and reversed others. For 2021, when looking at the entire CRE industry, one main shift is companies moving from dense city centres and large metros to smaller interior cities and to more suburban areas of these markets. This was a focus pre-COVID as companies shifted inland to avoid the high cost of living and doing business in the New York’s and L.A.’s of the world. Companies have also shifted operations away from the traditional downtown core for the same reasons although on a smaller scale than city-to-city migration.

 On top of the already prominent emphasis on green energy and LEED certified buildings, higher standards of cleanliness and safety will be added to that list. This will require some landlords to install new services and technologies that provide cleaner buildings such as, indoor/outdoor air flow, touchless entries and so on to attract tenants back to vacant spaces. This will favour more modern buildings going forward as they either have these services in place already or make it easier to install them in the future. Even though the industry will be changing, people are starting to become more optimistic as 23.7% of Canadians expect a stronger economy, up 6% from November.

Retail has been the hardest hit sector of Commercial Real Estate, with some areas of the world completely shutdown for in-person retail. Although online shopping has been growing and hit record highs during the pandemic, predictions of the death of retail are probably too harsh as “humans are social animals, and we need to be in social places” says one REIT investor. The level of online shopping that is being done right now is not sustainable, and in-person shopping will bounce back. The total retail market will shrink due the pandemic, but it certainly is not a dead industry. Shopping centres will have to get creative and convert unused space into complementary spaces such as Gaming and Entertainment Arcades, Office Space, or small Distribution Outlet.

Industrial real estate has been a bright spot throughout the pandemic and will continue to shine as life returns to normal. As consumers continue to order anything and everything online, distribution centers become more important to a company’s supply chain (Just-in-Time and Just-in-Case inventory).  Manufactures over the past 5 years have slowly moved their operations closer to home, this has been a 20-year trend for more technologically advanced industries¹, domestic manufacturing will trend upwards for companies to protect themselves from future border restrictions. People own on average 8 connected devices, with all this online focus; Data centres will continue to grow as people’s lives and companies shift all operations to “the cloud”. All these factors will lead to an increase in industrial space need.

Somewhere in-between industrial’s bright future and the shrinking of retail lies office space. Inevitably some workers may opt to continue to work-from-home, however 66% of workers want to either work full-time in office or part of their time². Suburban offices will benefit as companies can find more space for cheaper and “satellite” offices become the new normal instead of the giant headquarters we are used to seeing. Some companies will be looking for more space in the future in a way to emphasize safety and physical distancing. The medical-office subsector provides an investment opportunity as boomers grow older and health care spending continues to trend upward. As the sector decentralizes to reduce operating costs and move closer to patients’ long-term demand for medical office space will continue to rise.

2020 will be remembered as one of the most bizarre years in human history. The pandemic dramatically changed almost everyone’s way of life. With vaccines continuing to rollout throughout 2021, the economy will slowly but surely return to where it was before anyone had heard of COVID-19. Each subsector of commercial real estate has been affected in different ways by the pandemic, and the return to normalcy will vary for each property type but humans are social creatures and will need space to live, shop, spend time and work. The question is not if we return to pre-pandemic Commercial Real Estate activity but when.

Sources used in this article include pwc.com, bnnbloomberg.ca and finance.yahoo.com.  

David Wallach, CCIM, is President-Founder of Triumph Real Estate Investment Group of Funds and Riley Lyster is Investment Analyst, at Triumph Real Estate Investment Group of Funds.