In 2020, an unprecedented recession hit the commercial real estate sector and businesses. Due to the pandemic and the resulting uncertainty, many businesses have changed their practices to meet consumer demands, protect and retain employees, and comply with new government regulations.
Although commercial real estate conditions generally survive most short-term economic setbacks, the current recession is behaving differently from previous recessions, so it is somewhat unclear what the long-term effects will be on industry. The following questions and answers are our attempt to shed some light on where the commercial real estate industry is headed.
Why was this pandemic-induced recession so different from previous recessions when it comes to commercial real estate?
Three important factors explain why the commercial real estate sector has reacted differently compared to past recessions.
- Monetary and fiscal stimulus. Record amounts of stimulus have bolstered spending and bolstered the economy, giving users and office owners a longer runway to keep their businesses and properties running. For example, despite historically high vacancy rates and sublet space in the office sector market, stimulus funding has capped vacancy rates at a much worse level.
- Pandemic uncertainty. Unlike previous recessions, the economy has stalled for an extended period, forcing many businesses and industries to struggle mightily early on – unprecedented in our lifetimes. The reopening took place in spurts, as we faced variations, persistent fear and different responses from one municipality to another. Previous recessions seemed longer, slower and, in many ways, more organized. This recession has been rapid, extreme and highly unpredictable.
- Remote Capability Growth. Before Covid, many businesses and industries considered working from home taboo. Detractors said remote work hurts efficiency and productivity and felt more comfortable with internal employees to know where they were. The pandemic has proven – and many companies are realizing it now – that remote working can be productive and efficient, drive down costs, and help attract and retain talent. The pandemic has created a new way of thinking about business operations.
Will the office sector disappear due to the growth of remote work?
The office industry isn’t dying, it’s just changing. In terms of the positives and long-term sustainability for the office sector, it feels like we’re starting to learn to live with the pandemic as people return to the office more regularly. Businesses come and go, and many businesses grow and need more space, so space is always needed in regions, industries, and businesses. The office sector is definitely not dead.
We anticipate less need for office space in the short and long term. Remote features have benefits that save time and money and improve work/life balance for many office users. Many organizations are embracing a hybrid model and are clearly starting to see the benefits, and we don’t expect companies to ignore these benefits and go back to where they are today. Office demand may be down nationally, but there will be pockets of strength.
Over the past two years, we have seen many space users downsize to accommodate the new business environment, resulting in the historically high vacancy rates mentioned earlier and sublease space on the market. In turn, these changes have led to support in other areas such as small offices (
We believe rents and prices will soften over time as supply and demand rebalance and landlords adjust their space to accommodate the changing world. Additionally, most office buildings in major metropolitan areas are older or lack the bones for this new world. The cost of renovating these buildings will result in many purchase prices over the next few years.
What about other sectors of commercial real estate?
The pandemic has been a boon for the industrial sector as e-commerce became the sole source of supply for shoppers at the onset of the pandemic. Despite falling back from high levels, e-commerce remains high compared to pre-Covid times. Ceiling rates are at historic lows and rents at historic highs. The market remains well supported despite higher construction levels across the country.
Industrial commercial real estate is juxtaposed with commercial commercial real estate. Due to the growth of e-commerce and the addition of new business regulations, the pandemic was seen as the final nail in the coffin for many big-box retailers and malls. Thanks to the stimulus, the retail sector rebounded quickly, with online, stand-alone or drive-thru retail properties rebounding strongly. Although the retail sector appears to have fully recovered, challenges remain with inflation and high labor costs. Retail real estate fundamentals are strong today, but the retail industry is constantly in transition, and we expect that to continue.
The pandemic has been a global shock that has changed the way we live. The effects of the past two years will likely be felt in some way for the rest of our lives, especially when it comes to human interactions. Given that commercial real estate provides the framework for so many human interactions around the world, I find it hard to see a scenario in a real estate industry where we don’t see a long-term impact from this pandemic.