Market Trends in Commercial Real Estate
By Pepe Royo,
Office Renters Change Priorities in Wake of Pandemic
Office demand fell off a metaphorical cliff in 1Q2020 in the face of the COVID-19 pandemic, according to research published in April by Jones Lang LaSalle. Leasing activity dropped to 45 million sf in 1Q2020. The decline, though, started earlier in 2019, dropping from 68 million sf in 1Q2019 to 57 million sf in 4Q2020. Overall absorption in 1Q2020, including coworking space, barely topped 5 million sf, by far the lightest first quarter since the Great Recession.
The JLL research noted that only 4.9 percent of office workers will be comfortable working exclusively from home. But three in five workers still plan to work a considerable portion of their week at home. Such preferences could reduce overall demand for office space, focusing instead on privacy and separation from coworkers, in contrast to recent trends emphasizing open workspace and increased employee density.
Recreational Real Estate on the Rise
While there’s plenty of economic news that isn’t that positive at this time, some sectors of real estate could be poised to benefit from changes resulting from the COVID-19 pandemic.
In a Virtual Round Table hosted by the National Association of REALTORS® Land Institute, Justin Osborn, ALC, with the Wells Group Durango in Durango, Colo., highlighted possible growth in recreational real estate. He pointed to potential buyers “just looking to get away with all the sports clubs [and] recreation centers shut down; people just can’t get out to spend time as a family recreating like they were able to before all this started.”
While demand through March ticked slightly up, Osborn noted that many transactions are smaller in acreage, which could mean many buyers are first-time purchasers or individuals looking to own a private space to “hunt to fill their freezer.”
Case Study: COVID-19’s Impact on Eastern PA Big-Box Market
It’s difficult to encapsulate the consequences of the global pandemic, considering the variety in size and offerings of retailers. A recent Colliers International white paper details how 24 percent of Eastern Pennsylvania retailers with more than 500,000 sf were at high risk for disruption, including sectors such as consumer durables, non-food retail, apparel, and automotive.
Conversely, 49 percent were considered at low risk – including food and beverage, pharma and medical, and essential retail – while e-commerce, which accounts for 12 percent of all square footage, is at a positive exposure.
The risks vary geographically, with Northeast Pennsylvania facing more risk thanks to over 5 million sf of apparel space, accounting for 18 percent of its total space. In contrast, 62 percent of the Central Pennsylvania submarket is either low or positive exposure, thanks to a large footprint from food and beverage retailers.
Owners Have Reservations as Occupancy Drops
When COVID-19 went from potential economic disruption into the force that shut down the United States in March, hospitality was perhaps the hardest hit sector of commercial real estate. The data matched the narrative, with occupancy dropping 15.9 percent and demand falling 14.2 percent, according to 1Q2020 figures released by CBRE.
While every corner of the market felt the impact of the pandemic, high-end hotels were disproportionately affected. Of the 5,266 hotels to have closed through April 10, more than half were upper midscale, upscale, upper upscale, or luxury. The 234 luxury hotels represent 64.3 percent of all rooms in that category.
Budget hotel chains saw occupancy drop significantly through the first four months of 2020, with economy outlets’ occupancy falling from 52 percent to 37 percent. But those declines are relatively mild, with luxury chains seeing occupancy free fall from almost 70 percent to 10 percent.
Seniors Housing Responds to Mounting Pressure from Pandemic
Plenty of media attention has focused on COVID-19’s increased mortality rate in older individuals. The Centers for Disease Control and Prevention estimates nearly 80 percent of deaths in the U.S. occur in people aged 65 or older. These numbers are harrowing for owners, operators, and employees at seniors housing facilities. Due to the increased costs and an expected decline in occupancy, the sector is looking at real-time data to help forecast the continued impact of the pandemic.
Ventas, a Chicago-based real estate investment trust that’s among the country’s largest holders of seniors housing, announced rent deferrals for some of its operators in April. Such actions could be much-needed relief to struggling facilities, though Ventas noted deferrals will only be offered to locations that do not receive government assistance.
“There are now strong indications that tours and move-ins are beginning to slow,” Ventas said in a recent statement.
Mixed-Use Developments Can Keep It Local
Two executives with Gensler, J.F. Finn and Duncan Paterson, believe mixed-use developments could see a boost in light of social and economic changes. The pair write how microgrids can improve efficiencies for self-sustaining districts. A localized energy source improves flexibility and decreases waste. Additionally, mixed-use spaces encourage shared environments that can provide an array of products and services safely and efficiently. Inhabitants, the pair write, will be closer to health services in a self-contained area, while such a hyperlocal arrangement may improve a sense of community.
“This means that both the physical construction – the infrastructure, systems, and assemblage of uses – and the human places – the public spaces, communal areas, and places for dynamic collision – can create the kinds of extraordinary places that provide the maximum return on capital and human investment,” the two write.
Supply Chain Reacts to Social Distancing
Distribution centers have been critical in maintaining the supply chain for necessary goods in the U.S. But with economic uncertainty tied to public health challenges, social distancing within distribution centers is crucial to ensure employee safety and continued operation.
Cushman & Wakefield released guidelines for distribution centers to improve social distancing, with tips to stagger work shifts, reconfigure common areas, and discontinue large team meetings. The report also outlined three long-term changes to balance worker health and operational efficiency:
- Implement worker temperature checks and illness screening.
- Adjust layout of workspaces inside warehouse facilities to give employees more horizontal and/or vertical space to improve social distancing.
- Explore accelerated adoption of new technology and innovative use of existing technology.
Self-Storage Weathers Early COVID-19 Storm
The self-storage industry is often insulated from large economic disturbances, with many tenants renting spaces for years, despite the month-to-month structure of leases. March, according to statistics from Yardi Matrix, was a positive month for the sector, with demand improving amid the fallout from the COVID-19 crisis.
National rental rates for a typical 10-foot-by-10-foot, non-climate-controlled (NCC) unit remained flat year-over-year, at $116. Performance varied greatly regionally in the U.S., however, with Minneapolis seeing rates drop by 7 percent for 10-by-10 NCC units, while rates increased in Las Vegas, San Francisco, and Los Angeles.
Self-storage properties under construction or in planning represent 8.9 percent of total inventory, which is a large increase from the previous year. But in light of recent economic instability, Yardi Matrix projects deliveries to market will drop by 40 percent in the next five years.
Source: CCIM – Commercial Investment Magazine – Summer 2020