The rise of e-commerce always threatened the future of commercial real estate, although until now, nothing has changed drastically. Businesses have been forced to adapt to the changing technological climate. However, the popularity of brick and mortar retail has not decreased, it’s only slightly shifted forms in the past 20 years. Some mom and pop businesses and even large retail chains have gone under since the internet has become a part of daily life. But commercial real estate was still a thriving industry until the sudden onslaught of COVID-19.
Coronavirus will reshape the economy in ways that are difficult to fully predict. Commercial real estate is a sector that was immediately hit by the stay at home order and is likely to be drastically altered by the circumstances. Millions of businesses across the country lost their ability to make money overnight and there is little agreement or consensus among government officials about how impacted store owners and commercial landlords should handle the situation.
Rent freezes have been discussed but not in any official capacity. Stimulus money is being issued to help ease the pain – but due to the limited resources and potential reach of the SBA, it’s highly unlikely that this money will be sufficient to rescue every business that has been impacted. Tenants and landlords are left to their own devices to decide whether a rent furlough is appropriate or if it’s business as usual despite the worldwide economic crisis.
Change has already occurred and will inevitably continue. Whether that change is devastating or eventually for the better is yet to be seen. Here are my predictions for how COVID-19 will impact the future of the commercial real estate.
Decrease in Value
At least in the short term, you’re going to see a dramatic drop in the prices of commercial real estate. The longer the stay at home order lasts, the more businesses will eventually go under as cash reserves run out. With no new businesses opening up while others go down, landlords will be faced with a serious cashflow problem.
Once things start to open up, the landlords that manage to survive will need to find quick ways to solve this cashflow problem. However, the demand for a retail experience when Amazon is a viable option will not return completely (if it ever does) until there is a vaccine.
According to the laws of supply and demand, landlords will be forced to cut prices to attract whatever tenants can survive in these uncertain conditions.
Eventually, the demand will bounce back in most places, but it may take a while. Especially in cities where rent is over-inflated, commercial real estate values may be permanently hit.
Any business that is dependent on a large crowd, may not fully recover. For example, a landlord with commercial space on 6th Avenue in Manhattan may be forced to make some serious price adjustments. The pre-COVID values are based on the amount of foot traffic the location receives daily. Without that intense crowd, it may be hard to justify such an exorbitant price.
Further Blending of E-com and Retail
COVID-19 is likely to further catalyze certain trends that were already in effect. One of these trends is the death of pure retail.
Although the in-person shopping experience is not likely to disappear completely, the landscape of that retail experience is likely to change. The businesses that survive through this time will be the ones who already have an established online presence.
Likewise, this experience may make savvy businesspeople wary of committing fully to a brick and mortar location. The threat of a second wave of the virus or other future pandemics may force business owners to rethink their strategy and lean more heavily on e-commerce.
Pop up shops and other temporary retail channels may become the new norm. Landlords will be desperate to find tenants to cover losses, yet it’s unlikely that business owners will be ready to commit fully to signing a long-term lease until the future is more certain.
Those businesses that are currently thriving online may be the only game in town once the dust clears. However, those businesses will also have no dire need to open a permanent retail location while things are returning to whatever the new normal becomes.
Ultimately, certain retail staples will survive, especially those that are currently considered essential businesses like grocery stores and pharmacies. But this boon for e-commerce is likely to reshape how the commercial real estate industry returns. It wouldn’t be surprising if we see more Amazon Prime stores emerge than mom and pop storefronts.
More Government Intervention
America’s recovery from this crisis is not going to be quick and painless. Although the death rate is shocking enough to warrant drastic measures, the virus is wreaking social and economic havoc that is yet to fully unfold. The actual virus will eventually be eradicated; however, the gaps in the system that the virus exposed can never be unseen.
As a result, the government has to step in to provide relief while these issues start to be ironed out. The stimulus bill was the first example of this, but similar action must occur if America has a home of returning to relative normalcy.
Even once the stay at home order is lifted – until there is a vaccine available or a plan in place to mitigate the effects of the virus -commerce will be able to function efficiently. This means business owners will be swimming in uncharted waters for a dangerous amount of time and will need support from the government in some form to survive.
FDR’s new deal program is what pulled America out of the Great Depression. Government intervention is not necessarily the first step to totalitarian communism. However, with the world so politically unstable at the current moment, it’s wise to also be wary of government action.
What’s clear is that the commercial real estate sector will need further government assistance to return to what it was. It’s unlikely that the stimulus money and the private sector alone will be able to support it as we head into a recession (or potentially a depression).
Whether the government steps in than step out or steps in and stays in is tough to say. It’s not unthinkable that the federal government might start buying up the property if enough landlords start going bankrupt. At this point, there isn’t much they can do except watch the dominos fall and try to catch them as best as possible.
Whatever changes occur, it’s likely to set a precedent for the future. If the government stays back and the country heals on its own than the changes may not be as drastic. But if the if they are forced to inject more capital to keep the bottom from falling out, they’re not going to walk away once the crisis is averted.
From here on out, it wouldn’t be surprising if the federal government plays a larger role in commercial real estate. Although America is a long way from a socialist business sector, it’s inevitable that in the coming years, the government will be forced to intervene to protect public health and stimulate the economy. Whether they will use that power for good or evil is tough to predict.
