Impact of COVID-19 on Commercial Real Estate

As a result of the COVID-19 pandemic, some commercial real estate (CRE) owners are unsure how the pandemic will continue to impact future business. Companies have had to pivot their focus to increase profit and meet their customers’ needs during these uncertain times by enhancing their clients’ virtual experience and creating a safe environment for their employees. CRE leaders have also had to implement technology when working with their clients and employees to ensure their future success in the digital age.

If you’re a property owner, it might be time to evaluate your real estate portfolio while exploring the effect of COVID-19 on commercial real estate to capitalize on the unique opportunities that have been created in the market.

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The Commercial Real Estate Market Before COVID-19

Over the past several decades, the economy has declined due to other unprecedented events, including the stock market crash in 2008. Each setback has had an immediate or short-term impact on commercial real estate prices, but buyers and sellers were still active in the market.

Unlike previous events that have affected business credit and liquidity, the COVID-19 pandemic increased the demand for office space that could be utilized during quarantine to accommodate enforced social distancing for workers who could not work remotely. The unknowns surrounding this situation — including vaccine development and rollout, the spread rate of the virus, and the effect on the economy — have made some buyers and sellers hesitant to engage in real estate transactions.

Before the COVID-19 shutdown began, CRE market velocity was strong, and it appeared that the industry would thrive in the first few months of 2020. About three-fourths of people questioned in a global survey expected a rise in capital availability in 2020. Liquidity rates, capital availability, and balance sheets were healthy, allowing investors to have more control over their debt maturities.

The COVID-19 Impact on CRE

Financial markets sharply declined starting around the second week of March 2020 when the COVID-19 pandemic spread across the United States. Even though it usually takes the CRE markets a few months to feel the financial strain from a global crisis, commercial real estate outcomes after COVID-19 affected the industry immediately because many states closed non-essential businesses to reduce the virus’s spread. In particular, the retail industry underperformed by 14.7% from March to April 2020.

During these uncertain times, buyers and sellers have waited out the market to determine whether property value will rise or decline. Because of a delay in CRE sales, most brokers have experienced a decrease in financial security. Due to social distancing orders, potential buyers are hesitant to even tour a commercial property in the current environment. As a result, real estate brokers have had to become adaptable in establishing digital showing options to keep their potential clients safe.

Digital showings can help speed up the transaction process between the buyers and sellers of commercial properties. Virtual reality (VR) gives clients a panoramic view of their property in the comfort of their own homes before they buy it. Even though several CRE companies are still conducting business in person while following social-distancing guidelines, those who are uncomfortable or unable to meet in person because of stay-at-home orders can inspect the property virtually and complete business transactions online.

Subsectors of Commercial Real Estate Post-COVID-19

Consider the state of the following subsectors of commercial real estate after the COVID-19 pandemic.

Real Estate Investment Trusts (REITs)

REITs are companies that own or finance real estate property. The Data Center REITs index increased 34% in April 2020 because of the increase in employees working from home, but retail and hotel REIT indices have decreased by 48% and 53% because of the decline in out-of-state travel due to national and international lockdown orders. The long-term lease contracts that most REITs have with their tenants provided the financial security they needed to maintain their profit during the COVID-19 pandemic. However, the overall economic downturn has affected businesses and their tenants’ ability to acquire liquid assets.

CRE Developers and Brokers

Various commercial industries have changed how they use real estate properties, which in turn affects developers and brokers. Since some clothing and department stores have suffered and even gone out of business, there may be opportunities for developers and investors to convert these buildings into multi-use or multi-family properties instead. Some companies, such as Gap and Abercrombie & Fitch, have pivoted to focus on satisfying e-commerce orders from their stores instead of warehouses. Other companies shifting to e-commerce may have reduced need for retail buildings but increased need for warehouse space. Office tenants may need to consider expanding their building capacity to accommodate social-distancing guidelines to keep all their employees and clients safe, or they may downsize their space and continue having their employees work from home.

Private Equity Real Estate (PERE)

Private equity real estate involves acquiring private and public property investments by procuring them when their values decline. As a result, the PERE subsector hasn’t seen an immediate effect from the COVID-19 pandemic. Currently, investors are generally focusing inward by assisting portfolio companies in managing liquidity and operational costs. Some investors have shifted their focus to supporting the digital economy and other resilient assets. Others are seeking to evaluate the current worth of distressed assets or gateway markets.

Property Technology (Proptech)

Proptech features the use of information technology or innovative business models, products and services in the real estate market. These resources help CRE professionals find, evaluate, finance and manage properties. In particular, DocuSign, JetClosing and SmartRent have all helped businesses in the CRE industry thrive and meet their customers’ needs virtually during the COVID-19 pandemic.

Technology that offers digital solutions for property and building managers is more likely to succeed since CRE companies need these resources for operations and interacting with their tenants. As CRE industries strive to achieve a more data-driven approach to conducting business, proptech provides the tools they need to analyze information and make better decisions.

Proptech has helped the CRE industry handle the following tasks:

• Document management: Resources such as DocuSign, Notarize and Snapdocs digitize legal documents like closing documents and leasing agreements. These companies help employees share and keep track of important papers while working remotely.
• Closing efficiencies: Since most closings are taking place virtually or with limited in-person interaction, proptech startups such as Endpoint, Modus, JetClosing and Spruce have all streamlined the closing process and subsequent transactions.
• Maintaining social distance: Density is an online platform that utilizes computer vision technology to determine the density and movement of people in an office to help businesses create return-to-work strategies. HqO and SmartRent also help tenants and landlords stay at a safe distance from one another by having them conduct business digitally.
• Marketing and purchasing new properties: Databases such as Placer and Locate AI use artificial intelligence (AI) technology to help commercial property owners market the buildings and space they want to sell and strategize where to invest in new properties.

Government Actions Impacting Commercial Real Estate

The U.S. government and Federal Reserve have responded to the effects of COVID-19, especially those that have influenced the CRE industry. The Fed provided short-term commercial real estate COVID-19 relief to accommodate the increased selling pressure and lack of liquidity among the commercial mortgage-backed securities (CMBS) market. The government rolled out two relief packages in 2020 to help businesses financially.

On March 27, 2020, the federal government enacted the Coronavirus Aid, Relief and Economic Security (CARES) Act into law. This relief package provided financial relief for landlords with tenants who were behind on their rent payments, as well as CRE investors who didn’t have the revenue to pay their employees or cover operational costs. It offered more liquidity for businesses, raised bonus deprecation, allowed companies to use net operating losses from previous years and permitted companies to obtain cash refunds for carrying forward minimum tax credits.

In December 2020, the federal government released another COVID-19 relief package to help business and property owners. The agreement gave an extra $284 billion toward the Paycheck Protection Program (PPP) loans and $20 billion for Economic Injury Disaster Loans (EIDL). It also permitted some businesses to take out a second PPP loan to continue payroll for their employees and other expenses. These loans are also eligible for loan forgiveness. Besides helping landlords and business owners, the relief package also provided rental assistance for tenants.

Commercial Real Estate After the COVID-19 Pandemic: Reducing the Impact

Although we’re still unsure how the COVID-19 pandemic will specifically affect the CRE industry, we know that technology will now play a significant role in how companies conduct business. It seems that these unforeseen circumstances have encouraged CRE industry leaders to bring their companies into the digital age to meet their customers’ needs better and create a safe environment for their employees and clients.

Digital upgrades, such as customer relationship management (CRM) software and predictive analytics, can help employees do their jobs better, whether they work remotely or interact with one another in the office. Technology can also help business owners and CRE professionals prepare for unforeseen circumstances in the future.

Consider some of the ways you can implement digital technology into your business to meet your customers’ needs and conduct business during uncertain times:

• Implement hybrid human-machine job responsibilities: Job roles within the CRE industry should evolve much more quickly after the COVID-19 pandemic because of the need to implement automated technology and remote work for employees. Skills in areas such as cloud computing, data analytics and software development will become as important as traditional skillsets, such as marketing, negotiating and prospecting. Consider how hiring and training staff with the ability to navigate software can enhance your business.
• Pursue digital and talent transformation: Appeal to a younger demographic of employees by simplifying the recruitment process and strengthening talent analytics. Consider widening your talent acquisition by hiring contractors or freelancers who have the technical skills but may not have real estate experience. Offering training programs for all employees to learn how to navigate your company’s new technical services instills a lifelong learning culture in your workspace.
• Create an attractive work environment for employees of all generations: In 2019, about 45% of CRE employees were 55 or older, and only 4% were between the ages of 19 and 24. This generational gap creates a work environment that favors employees from older generations instead of accommodating all workers. Implementing technology and support attracts younger people and creates a welcoming environment for all employees and clients.
• Find ways to save time: Predictive analytics can help a leasing manager save time by creating different lease optimization strategies so they can focus on their tenants and clients. Automated systems for invoicing and other tasks can also save time for your employees. Explore the different types of AI, VR and analytic technology to find out what tasks you can automate to make your employees’ jobs easier.
• Establish an efficient digital work environment: You can use technology and remote work to create a more pleasant employee experience during the workday. Consider incorporating flexible work hours and location to establish a productive environment at home or in the office.
• Promote a sense of belonging: After a pandemic, your employees need to feel like you care about them. Since remote work is a relatively new concept for many, especially in the CRE industry, they need your patience as they navigate a work-life balance and deal with burnout. You can show your employees that you care about their emotional, physical, and mental well-being with intentional return-to-work strategies.

How to Sell Your Commercial Property During the Pandemic

If you have real estate to sell, you can sell it during the pandemic when you work with a reputable auction company. Take advantage of some of the following benefits of selling your commercial property through an auction:

• Non-contingent contract: When you auction your commercial property, the closing process can be much shorter than traditional real estate because of the non-contingent term of sale. Since the buyer agrees to purchase the property as-is, you don’t have to spend time or money repairing or cleaning it. We decide the closing date before the auction begins, so all parties know when the sale should be complete.
• Strategic marketing: When you sell real estate through a reputable auction company, you can develop quality marketing strategies to attract potential buyers. Cates Auction provides a targeted plan based on your timeline and financial goals, helping you reach a broad audience.
• Competitive bidding: An auction creates a sense of urgency around your property, especially when potential bidders can see one another and size up the competition. We’ll help you develop a starting price that attracts your target buyer and enables you to get the highest return for your property.

Sell Your Commercial Property With Cates Auction

At Cates Auction & Realty Company, we’ll help you sell your property efficiently. When you trust us to market and auction your property in Kansas or Missouri, you’ll have more control over the sales timeline, and the short closing process gives you financial flexibility. If you’d like more information about selling your commercial real estate property through an auction, contact us online for a free property analysis.