The Initial Outlook for Commercial Real Estate in 2021 Was Uncertain

The Initial Outlook for Commercial Real Estate in 2021 Was Uncertain

2020 was a hard year for families, small businesses and corporations alike. Many sectors in the commercial and industrial markets saw severe downturn – a macro reflection of the housing and job crises in the private sector. Small business growth halted as a result of lockdowns and disruption in supply chains. Growing corporations stalled as they navigated pivoting to remote operations. Industrial companies paused as well as they tried to navigate damaged supply change and retrofit manufacturing facilities to be COVID-compliant. However, while some commercial sectors like retail, hotels and commercial real estate took real hits, others, like healthcare, multifamily housing and industrial real estate remained steady or even grew. Why?

Why COVID Hurt Some Business’ Growth and Helped Others

People stopped travelling when the pandemic began, which hit the hotel industry hard. Office buildings and spaces took a downturn as lockdowns caused people to work from home, and businesses with leased office spaces struggled to stay afloat, implementing mass furloughs as a result. But on the opposite end of the spectrum, data centers were busier than ever as medical professionals looked for a vaccine, and industrial real estate grew as retail businesses turned toward e-commerce and needed more warehousing space. COVID’s effect on the commercial real estate markets in 2020 was definitely a mixed bag.

As investors in commercial real estate looked towards 2021, they had a lot less of an idea of what the year would look like than we do now. In late 2020, investors still thought that the effects of the pandemic would disappear and allow for a quick recovery. Some even thought that 2021 would see the commercial real estate market bounce back to pre-pandemic levels. But as we head into fall of 2021, it’s becoming clear it’s a little more complicated than simply turning a corner and returning to “normal.”

Winter and Spring Showed Commercial Real Estate Struggling to Recover from COVID

Commercial real estate companies had to make a lot of changes to the way we do business as a result of lockdowns and social distancing. With commercial real estate, it’s hard to attract new customers without being able to visit properties or create face-to-face rapport. Just the same, commercial construction costs skyrocketed as supply lines became slow, disrupted or completely fell apart. That meant most businesses didn’t want to start a new commercial construction project at this time and, as well, that large corporations who sent people to work from home are actually deciding to offload office spaces. We really felt the sting of the pandemic. Nevertheless, we persisted. And initially, experts and investors in commercial real estate thought 2021 would be a turnaround year for the entire industrial and commercial real estate markets as a whole.

Q1 for 2021 came back as a wash. On a whole, the commercial real estate market began to recover, but remained pretty weak and in an uncertain position. Buying activity for large commercial property acquisition declined by almost 30% in Q1, with declines in all commercial spaces except the hotel industry. But didn’t we just say the hotel industry was negatively impacted by the pandemic? Well, its recovery is due to indirect causes. Investors in commercial real estate are looking at hotels – their setup, size, locations – as prime commercial properties to convert to multi-family housing as people exit en-masse from cities. Not to mention that some hotel properties at prime locations like airports saw a huge increase in business and value as people needed to quarantine if travelling.

In smaller commercial property acquisitions, though, Q1 saw a downturn of only 1%. Respondents to a survey of members of the NAR reported an increase in sales of land for development as well as industrial properties, and reported a downturn in all other types of commercial properties. Why the differences? Because, as the pandemic continues and its effects continue to radiate throughout every corner of our economy, it’s becoming more and more certain that there is no “back to normal.” So instead, players in industrial and commercial real estate are looking ahead to a new normal, and that means adopting permanent changes in the way we do business. This has been especially true for the retail market, which has been affected in extreme ways by the COVID pandemic.

The Astronomical Effect the Pandemic has had on the Retail Market Space

Retailers of all kinds, both goods and service-based, were completely shut down when the lockdowns began. Every town saw local retailers struggle, if not completely go under, as the pandemic continued through 2020 and into 2021. And as things began to reopen, retailers were eager to adjust so they as well could reopen. Consumers were just as excited, but knew there were likely to be changes. Some clothing retailers, for instance, opened doors but kept fitting rooms closed. Grocery stores initiated socially-distanced checkout lanes. But these are just small pieces of larger trends that we’re seeing in the retail space in 2021 and beyond:

  • Adding Online Buying to Sales Strategies: Retailers now realize, between increasing competition from online retailers like Amazon and Shein, as well as the pandemic and its lasting effects, that a storefront is simply not going to cut it anymore. So every retail space that can, including local grocery stores and farmer’s markets, are adding online options for purchase and delivery.
  • New In-Store Layouts Taking Social Distancing into Account: We’ve probably noticed this the most at clothing retailers, where displays have been spaced out, aisles have been widened, and the checkout line area has increased so people aren’t stood so close to each other. These measures may have started out temporary, but they’re likely to stick around. It follows, then, that commercial construction of new retail spaces will look a lot different than it used to. And it also follows that it might be hard for landlords to lease the retail spaces in their existing buildings without doing extensive renovations. After all, we’ve learned over the past year that in-person shopping was a top risk for contracting COVID. We don’t expect commercial real estatein the retail sector to recover any time soon. Or ever. It’s more likely moving towards light industrial-type commercial real estate. Speaking of…
  • More Reliance on Warehousing/Stockroom Space: The more things move online, the more important it is to have inventory on-hand, even though you don’t need it on the front room floor. This is where the industrial real estate market is actually being helped by the pandemic; businesses need new manufacturing, warehousing and packing/shipping spaces as they change to online retail. And they also need facilities that are designed with cleanliness and social distancing in mind. Players in industrial real estate will need to realize that adding build-to-suit terms for tenants in their industrial property leases is going to be a huge incentive for growing businesses who need new space that’s COVID-compliant but don’t want to or can’t handle an entire commercial build.

How the Uncertainty of COVID is Changing the Look of the Commercial Real Estate Market

The farther we get into 2021, it’s becoming clear that there are going to be big changes to the type of industrial and commercial clients we serve. As a full service commercial real estate company, we have brokerage, development, construction and property management to consider. Investors are nervous, markets are changing, and virtual business is becoming more and more prominent.

One thing we’re starting to notice is that construction of build-to-suit commercial real estate properties is becoming more present in the commercial and industrial real estate markets. Why? Because as companies try to grow, they’re understanding that, post-COVID, the best way to expand business is with new facilities that are tailored exactly to their needs. A retailer doesn’t need the same spatial solutions as a manufacturer, a grocery supplier, and so on. But each of these businesses do need facilities that allow them to conduct business efficiently while also taking necessary measures for the next pandemic. Because there will be one, so, better safe than sorry.

Another thing that’s changing is land development for residential projects. Multi-family housing and single family homes are on the rise as people leave cities for suburbs. This means the housing market needs more space for more housing projects. We’re also seeing an increase in healthcare-related commercial property transactions as cities realize they need to be prepared for if something like this pandemic should ever happen again. And, of course, as we’ve discussed, business in industrial real estate is continuing to grow.

Looking to the Future in Commercial Real Estate Development

Overall, the outlook for commercial real estate is good. Investors say we’re trending low but stable, and predict increases in purchases of land for development, residential projects, and industrial spaces for the rest of 2021. And as we enter 2022, transactions for residential development will continue to rise as available space becomes limited and occupancy rates near 100%.

The Schueler Group has been on top of this from the very beginning. When COVID restrictions hit, we adapted to more remote team working. It took a lot of getting used to, but our companies are so used to working together that we’ve managed to keep up momentum even as the worst of COVID hit commercial real estate firms like ours. In fact, our commercial contractors at Bunnell Hill have had a really busy year! We are committed to fostering our own company expansion, and we’re committed to helping businesses looking to expand to do just that – pandemic or not. So, while no one’s quite sure what the coming months will bring, we’re staying ready.

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