COVID-19 blindsided the commercial real estate industry. Unlike previous pandemics such as SARS (Severe Acute Respiratory Syndrome) and MERS (Middle East Respiratory Syndrome), this novel virus shut down the United States’ economy and brought most of the world to its knees.
Additionally, the demand for office space may be altered for years to come. Over the past several years, there has been a concerted effort to pack more people into a smaller space. Now, with social distancing guidelines and work-from-home policies, office buildings have become cavernous. Today, they resemble a morgue rather than a vibrant work environment. Expect companies to rethink their workspace.
Second, with revenues down significantly, both landlords and tenants are rethinking their lease options. Some tenants have stopped paying rent altogether and are relying on clauses in their contracts to abate rent. Such contract clauses such as Force Majeure, Material Adverse Change (MAC), and Frustration of Purpose provisions in leases are being used by tenants to stop paying rent. Even Purchase & Sale Agreements (PSAs) are being renegotiated between buyers and sellers.
Third, some businesses are flourishing due to increased demand for their products during times of crisis. Amazon, for instance, is doing a booming business. The distribution sector for industrial real estate seems to be thriving. And with America discovering that 95% of its medicines are produced in China and other foreign markets, it appears there will be forthcoming incentives to bring medical manufacturing back home. Further, interest rates have been dropping which gives property owners a chance to refinance at lower rates.
What will the future look like for the commercial real estate industry? As we move through the five stages of fear this pandemic has caused, i.e., panic, avoidance, struggle, coping and actualization, there will be both losers and winners in commercial real estate. The entertainment sector will eventually regain its footing because consumers are tired of staying at home and cooking their own meals. The office sector will adjust to changes in the workplace, which will create opportunities for investors. The industrial and medical sectors will flourish.
In short, this is a time of uncertainty that will take time to sort out. Real estate investors and practitioners should look for opportunities to enhance their portfolios by picking up commercial properties at below market prices. Eventually, the commercial real estate market will adjust to the new normal.
