Several Ways the Pandemic has Changed Commercial Real Estate
The COVID-19 pandemic has forced the commercial real estate market into a series of seismic shifts, accelerating some trends, and bringing others to a complete halt.
It wasn't so long ago that everyone talked about the importance of shared workspaces, community amenities in apartments and how modern-day consumers preferred experiences over stuff. Those concepts look much different in a world where social distancing is a health imperative.
The public health crisis sparked renewed interest in the suburbs, rendered in-person entertainment and travel businesses impractical, and created hot commodities out of dull industrial buildings.
With 2020 now in the rearview mirror, it would be difficult to overstate how surreal the past year has been. It may, however, have a very real influence on the future.
Here are eight trends of the past year that could have lasting effects on where and how people use space:
8. Remote Working Accelerates As Employers, Led by the Tech Giants, Shift Workforces Out of the Office
Large technology companies including Facebook and Google emptied their offices long before any shelter-in-place orders were issued, sending employees home. As cases spread, the companies were first to extend their work-from-home policies. They began by pushing deadlines through summer 2021 and, in some cases, indefinitely.
San Francisco-based Twitter and Square both decided in May that employees would have the chance to permanently work remotely, a shift that triggered a series of smaller companies to follow suit.
According to internal research, most major U.S. cities still report less than 20% physical occupancy of office space as employees remain at home.
The bet among real estate experts is that many employers will retain flexible work-from-home policies even after workers return to the office.
7. Global Tourism Shutdown Strangles Hotel Industry
Travel bans, canceled flights, shelter-in-place orders and strict capacity limits gave the hotel industry little to celebrate in 2020.
Summit Consulting Group’s hotel research and analytics estimates it could take up to five years for the hospitality sector to fully recover. Revenue per available room, a key metric for hotels, bottomed out after an 80% drop this spring, and average daily rates are estimated to be down by about 21% compared to last year for the remainder of 2020 for hotel properties across the country.
While recent developments for a COVID vaccine have provided a glimmer of hope for operators, the recent surge in cases across the United States means the industry is far from any semblance of a recovery. Many expect leisure travel to boom once the virus is brought under control and people are freed from their homes but businesses could be slower to send workers back on the road now that many have become accustomed to video and online meeting options.
6. The Nation's Most Expensive Housing Markets See Renter Exodus
The country's multifamily market was suddenly split between expensive urban areas and quiet suburban towns at the onset of the pandemic. As work-from-home trends evolved and renters looked to move out of costly and cramped spaces, crowded downtowns faced a drain in occupancy.
In the nation's most expensive apartment housing market, San Francisco, the fallout from the pandemic's outbreak drove the multifamily vacancy rate up to a historical high of more than 11.5%, according to SCG data. Comparatively, the national vacancy rate is 6.8%.
Rents, especially for those among some of the high-end apartment properties, nosedived by as much as 18.3% in the tech-heavy bay city. Landlords have had to respond by offering steep concessions, with some property owners touting perks including as many as three months in free rent, internet credits, personal training sessions and allowances toward moving expenses.
Many will be watching to see if renters re-embrace downtowns once the pandemic subsides or whether the move to less crowded spaces becomes a more durable trend.
5. Companies Pause Development, Expansion Plans
Search engine giant Google, one of the largest occupants of office space in the country, hit the pause button on operations including data centers, hiring, marketing, travel and real estate investments as pandemic-related uncertainty climbed early this year.
The move was emblematic of a slowdown in the tech industry's rapid acceleration and leasing activity. As the healthcare and financial crises wore on, companies became increasingly prudent about their future space needs, and many decided to shrink their office footprints, put their space up for sublease or shift entirely to a remote-work model in an effort to curb costs.
Like other tech companies, Google has started to put its foot back on the gas for development, though the new activity is still below its pre-pandemic level.
4. Biotech Growth Fuels Shift to Life Science Development
The COVID-19 pandemic has driven historical gains in the biotech sector, pushing fast-growing companies to gobble up space and drive most of the leasing activity for markets across the country. Throughout 2020, rents for lab space rose, vacancies plunged and employment figures climbed.
The phenomena inspired big-name developers such as Boston Properties to say they would pivot office development plans into new life science projects, as leasing from most office users dwindles.
According to a recent research report, about 14 million square feet of lab space is under construction nationally, but demand among biotech tenants outpaces what's in the pipeline by almost 2 million square feet.
In the nation's top life science markets such as Boston or South San Francisco, lab space vacancy is at a historic low of less than 8%, which has given landlords the chance to drive rental rates even higher.
3. Trophy Skyscrapers Sell At a Discount
The clearest sign of how some of the leading office sales got done in premier markets this year is the delayed and discounted sale of the Transamerica Pyramid in San Francisco, the nation's most expensive office market.
After years of growth driven by the city's tech sector, San Francisco's office market was in for a rude awakening as the pandemic spread a wet blanket over previously white-hot demand for space among both tenants and investors. In a sign of the times, the anticipated sale of the Transamerica Pyramid office complex was delayed by several months and eventually sold in late October for $650 million, the priciest workspace sale in the city for the year.
While the price tag was high, it represented 10% off the $711 million purchase price that was originally agreed upon in February. Debate has now begun over whether demand will ever reach as high as it once did for space accessible only by elevator.
One sign of hope: Facebook's surprise decision to sign New York City's largest office lease of the year. The social media giant agreed to move into all 730,000 square feet of office space in the Farley Building at 390 Ninth Ave., which is located in Vornado Realty Trust's Penn District redevelopment in Manhattan next to the nation's busiest transportation hub — this after it said in May it would transition its workforce to a remote-work model.
2. Landlords and Tenants Spar Over Who Should Pay, And How Much
The pandemic split the brick-and-mortar retail world, showing the durability of businesses that provide essential goods such as groceries and pharmaceuticals and rendering uncertain those who products and services could be delivered online or to the home.
Some sectors found themselves on both sides of the divide: Starbucks and many fast food establishments found their footing by focusing on takeout food while many mom-and-pop restaurants struggled to adapt to ever-changing restrictions.
The crisis left many to reevaluate their real estate footprints, sparking growing tension between landlords. Some decided to take the matter to court as part of attempts to recoup unpaid rent, fight over lease negotiations or break rental agreements entirely.
One of the more closely watched battles involved the nation's largest mall property owner, Simon Property Group, who sued the nation's largest retailer, Gap Inc., over $66 million in unpaid rent stemming from forced store closures across the country.
The legal tussle escalated with Gap later suing the landlord over failed attempts to renegotiate leases, setting the stage for similar lawsuits among struggling landlords and retailers fighting to protect their businesses in the face of massive drops in business. The pandemic is likely to lead to new lease language in the future.
1. Amazon Expands Mammoth Footprint Even Further With New Leases, Acquisitions
If e-commerce conglomerate Amazon was already on the fast track to growth at the start of this year, the pandemic strapped a rocket pack to its ambitious plans and fueled millions of square feet of new leases and commercial real estate acquisitions.
According to Realty Capital Analytics research, the retailer was on track to expand its fulfillment capacity by 50%, or 300 million square feet, before the end of 2020, a massive spike that drove it to snap up swaths of available industrial space across the country.
In this year’s second quarter, other retailers were facing steep revenue declines and serious headwinds. However, Amazon invested more than $9 billion in fulfillment, transportation and Amazon Web Services capital projects in that period, according to company SEC filings.
The company is even willing to throw serious money at plans to open in premier markets including Los Angeles. The strategy is marked by its recent $200 million purchase for the site of a future e-commerce center in San Francisco.
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