What to consider in post-pandemic commercial real estate investments?

post-pandemic commercial real estate market in 2022
post-pandemic commercial real estate market in 2022

On March 20, 2020, the world came to a standstill. The global pandemic had an adverse impact on almost every business and person. With endless lockdowns, the lifestyle of people saw a permanent change. People can no longer go outside, meet, socialize as they used to. This change in lifestyle and work habits has not only disrupted the workforce but also the utilization of real estate properties. As a result, this has led to a shift in preferences of investment opportunities in the post-pandemic commercial real estate market.

Here, Lilypads focuses on the emerging trends in commercial real estate that investors must consider while investing in commercial properties, post-pandemic.

Impact of COVID-19 on Commercial Real Estate: what will the post-pandemic commercial real estate market look like?

For decades real estate has always been a favored investment option in the world due to its physical attributes. But in the past year following lockdown and social distancing norms, specifically commercial Real Estate had been hit hard. 

With businesses having introduced work from home it is now gaining acceptance by employees and becoming a new normal. Similarly, in the case of the retail industry with outlets and shopping centers being shut down, people have been inclined towards online shopping via e-commerce websites to fulfill their needs. Businesses like restaurants shifted towards takeouts and pick-up deliveries like Uber Eats and Amazon Fresh.

While the rest of the commercial real estate property sectors somehow managed to survive, however, Covid-19 had made a pretty big dent in the following two asset classes.  

Impact on Office Spaces

One of the biggest impacts on commercial real estate was when the world shifted from physical office space to remote work. What was meant to be a temporary solution has now become a new normal. Previously many employees did not have the leisure of flexible work life and working from home was a rare habit. 

A recent study by the World Economic Forum shows that 66% of employees prefer a flexible work life even after the pandemic. And in some cases, studies show that employees prefer to look for a new job than return to the office. As a result, the market saw an increase in vacancy rates for office spaces.

Besides, there is a rise in the construction of hybrid workplaces. Read Lilypads’ article on the rise of a hybrid workplaces here.

Impact on Retail Properties

This is yet another sector of real estate that the pandemic had its impact on. Retailers had to face various harrowing short-term challenges like the health and safety of workers, disruption in supply chains, cash flow, and labor force. Retail stores saw a steep decrease in footfalls, one of the major factors that keep this sector afloat. 

E-commerce websites saw a 40.3% increase in spending and traffic in 2020 compared to 2019. Due to such an environment, most retailers and tenants have decided to close down stores or seek a rent deferral. As a result for investors, this severely affects the cash flows. Retail landlords have reported that almost 50% of commercial retail rents have not been paid. 

Post-pandemic Commercial Real Estate Trends

The Commercial real estate market fell off the cliff in March 2020.

Businesses are coming up with new and improved ways to stay sustainable in this weather. According to experts some of the following market trends are here to stay for the long term. It is expected to restructure the real estate industry permanently.

1. A Brand New Office 

While the majority of the businesses are comfortable with WFH (work from home), some are willing to return to the office partially. Employees are looking for flexibility in their work, remote working allows them to maintain a sweet balance between work and life. 

Although there are some challenges to 100% remote working, such as limitations to collaboration, training opportunities, and brainstorming sessions. To overcome this, companies are designing hybrid models of working to bring employees into an office workspace while still maintaining the flexibility of working from home. 

In post-pandemic commercial real estate, the office space needs to undergo some changes like enhanced amenities, larger square footage area to accommodate social distancing cubicles and an improved ventilation system.

2. New Lease Structure 

The transformation to the hybrid workplace, the decrease in footfalls in retail stores, and the uncertainties of Covid-19 have led to a high increase in vacancy rates. 

As a result, business leaders are concerned due to robust economic growth. Tenants are still hesitant about longer-term commitments, which results in flexible leasing arrangements and short-term renewals. And experts think that this trend might stay in the post-pandemic commercial real estate market.

3. Disruption in Retail Properties in a post-pandemic commercial real estate scenario

The pandemic has seen a remarkable change in shopping behaviors. Retailers need to adapt to the new trends to survive in this new environment.

a. Importance of Omnichannel Sales

As the world is moving towards digitization, the retail industry can no longer depend solely on storefronts. Retailers also need to expand their sales in the digital world via websites, and apps.  

b. Importance of Stockroom

As retail owners are expanding their business to the digital realm, owners must set up the stockroom to fulfill orders which are now coming from different channels.

4. Suburban Living 

Due to the impact of the Covid-19 pandemic, big cities like New York, Chicago, and Los Angeles saw a decrease in their population. People work from home and are searching for places in the suburbs or other cities that offer a lower cost of living and a better lifestyle and social issues. With the economic downfall and stagnant wages, the need for affordable housing in post-pandemic commercial real estate is greater than ever.

5. Low-Interest Rates

As of September 2021, the Federal Reserve has kept the interest rate to almost zero. According to them, the interest rate is likely to remain low throughout the whole year.

and possibly in the foreseeable future too. With all-time low-interest rates and flexible mortgage guidelines, investment in post-pandemic commercial real estate properties has become more affordable. 

6. Increase in growth of Multifamily Properties in post-pandemic commercial real estate

Housing will always be a primary need for everyone. In tough times like these people will always tend to pay off their house rent as a top priority. Because of low entry barriers multifamily is expected to grow shortly. 

7. Investors are also considering climate risk in post-pandemic commercial real estate investments

Construction of buildings accounts for around 40% of global carbon dioxide emissions. Carbon emissions laws have been adopted by states to control the rate of emissions of carbon dioxide. Commercial real estate developers have to undergo certain mandatory procedures such as installing proper ventilation to reduce carbon emissions. But in the recent light of Covid-19, the legislature has rejected all requests to slow down the implementation of these laws. 

The Lilypads Bottomline

As the world is entering a recovery stage from the impact of the Covid-19 pandemic, businesses are returning to normalcy. The demand for commercial real estate remains strong. Different property types like storage units, multifamily apartments, and warehouses have gathered quite a popularity amongst investors. Although it is uncertain when this pandemic will be completely over, investors looking for good opportunities should be aware of the new norms, have an insight into real estate capital markets, and must adapt to the emerging trends in the post-pandemic commercial real estate market to make the most of them.