The impact of COVID-19 on Commercial Real Estate

Offices: There is a tug of war between working-from-home trends and the need to have offices which are healthier, offer more space per person and are designed for greater flexibility. As office space is used more for collaborative activities and less for individual work, employee productivity necessitates a different physical layout. Buildings that can be converted to satisfy the shift in office work culture are expected to outperform their competitors. Corporations’ willingness to expand their office footprint beyond centralized headquarters in traditional gateway business districts, combined with employees’ desire for a modified office/home-work model, may positively affect investment in corporate relocation to secondary markets. This includes a wide range of advantages such as a more attractive quality of life, offering more space, lower operating costs and shorter commutes.

Residential: Residential real estate is anticipated to exhibit a corresponding shift in space needs and space utilization. For example, residences will have some dedicated space to support working and learning from home. As the workforce becomes more mobile, we expect to see the advancement of a hybrid model – work from home supplemented by regional corporate offices or access to local co-working facilities. As a result, housing demand may continue to increase in less-dense communities where more affordable prices enable more space. Another major factor in this migration, is that proximity to the office is no longer a driving factor in the selection of one’s primary residence. Further, technological advances are enabling new product offerings, such as single-family rentals, to accommodate consumer preference for renting over ownership without sacrificing space or location.

Retail: One of the most deeply affected sectors which was already in a weakened state prior to the pandemic, retail should continue its transformation in the years to come, including shorter lease terms, increased penetration of revenue-share rent models, and higher demand for experiential space. As e-commerce develops, online retail will continue to gain market share; however, the impact may vary significantly across specific geographies and products. For example, considerably less people will purchase consumer products in a physical location, while food, discount fashion and other specialized sectors will continue to have greater stability.

Logistics: Already high in demand before the crisis struck, the need for warehousing space has exploded in 2020 and will follow the increased penetration of e-commerce. Overall, pricing has caught up with these expectations; however, multi-tenanted light industrial and warehousing continue to offer attractive entry points for those able to take on the operational challenges of this sector.

Hospitality: The short-term effect has been dramatic due to closures. Going forward, the assumption is for less business travel in the medium-term as people leverage technological tools to limit less-productive travel. Hotels dependent on large conferences may suffer a prolonged recovery until people build confidence in COVID-related therapeutics, corporations lift travel restrictions and corporate budgets return for travel and entertainment. Overall, it is likely that a noticeable percentage of hotels will fail and be converted for alternative use, creating reduced competition for the survivors. At the same time, the disruption in the industry is expected to generate numerous investment opportunities for “rescue capital” to provide owners with the time to benefit from a longer recovery period in certain types of leisure travel and smaller, locally-dominant properties.

Data Centers: The common denominator among all the asset classes and trends discussed is the proliferation of technology. The commodity resource of the current generation is information and big data. While consumers’ changing behaviours impact where one sleeps, how one shops or how entertainment is accessed, the support system for these changes remains the classic digital infrastructure. To some, data center and cell towers are esoteric assets easily exposed to obsolescence, when in fact, they have increasingly become the foundations of day-to-day life. Data center and cell tower Real Estate Investment Trusts have experienced increased acceptance from investors resulting in these digital infrastructure companies boasting some of the largest market capitalizations for real estate companies across the globe.