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4.30.2021

Injecting Optimism

President Biden’s announcement that every American adult will have access to a vaccine by the end of May is just one recent highlight in an ongoing stream of good news about vaccine timelines, availability, and efficacy.

That’s obviously welcome news for everyone, and commercial real estate professionals are no exception. For the first time in a long time, the prospect of a nationwide reopening and a return to something much closer to normal seems within reach. That also means that now is the time for industry professionals to start making plans and preparing for the realities of a post-COVID world.

What does that process look like? And what should commercial real estate decision-makers be prioritizing and planning for in the weeks and months ahead? Not only will operational changes need to be made, but new realities in and out of the workplace will change the way employees and employers alike view office work in a post-COVID environment. Understanding what those changes will look like, what parts of the industry are likely to bounce back first, and what obstacles and opportunities will arise going forward will be critical—not just for the remainder of 2021, but for a very long time to come.

Size and space

For decision-makers, determining their teams’ appetites and attitudes towards returning to the office will be Job 1A. The need to listen to employee sentiments will be essential. While the potential for smaller footprints and the long-term viability of more flexible remote-work operational models have both been hot topics of conversation, the energy and engagement of in-person office work will be difficult to resist for many. The synergy and social connections of the workplace are impossible to recreate over a video call, and the increased creativity and productivity of shared workspace will likely drive a larger-than-expected number of employees back to traditional office environments.

Another reason to be somewhat skeptical of the small-office projections is the simple fact that not only will growing businesses need more room to spread out, but larger spaces may be needed to accommodate fewer numbers to ensure that employees feel comfortable and safe. While creative solutions (like offset shifts) may reduce some of the need for larger space, many of those shared-workspace solutions would necessarily involve some level of additional cleaning and sanitation responsibilities that may make them unappealing or unworkable. The bottom line? We are unlikely to see much movement in either direction with respect to office space size requirements.

Sanitation and safety

Regardless of vaccines, wearing masks indoors isn’t something that’s likely to go away anytime soon. Employers should also prepare for the reality that enhanced hygiene measures and social distancing guidelines are likely to be an unavoidable reality for (at minimum) the remainder of 2021. It’s unclear to what extent employers will be issuing health and safety guidelines (and how many of those guidelines will be in the form of recommendations versus mandates), but a lot will depend on CDC guidance and on what the federal or state regulatory landscape looks like. Regardless, some degree of additional cleaning and health and safety measures will almost certainly be a workplace reality, and decision-makers will need to plan accordingly. Whether it’s having the right cleaning supplies and extra masks on hand, or taking more dramatic steps like upgrading ventilation or engaging in more rigorous and frequent filter/HVAC changes and maintenance, new practices and protocols will need to be in place. Perhaps counterintuitively, communal spaces like meeting rooms and fitness facilities are likely to stay. Demand remains high, and some tenants have already made their feelings on that issue very clear to landlords.

Winners and losers

As the economy continues to recover and COVID numbers go down during the summer months, we can expect demand to drive a dramatic commercial real estate resurgence. The pace of that recovery will be rapid. New builds may be less common than redevelopment projects, and we are likely to see a boom in office renovations. With regard to individual industry segments, the hard-hit hotel sector will bounce back quickly, fueled by pent-up travel demand, and office should get a boost by a slower-but-still-significant restaurant rebound and normalizing multifamily cash flow. Strong performance in industrial will remain the industry standard-setter, however, especially with regard to new ground-up development opportunities. Pre-COVID trends will continue or accelerate, as underperforming malls will either fail or be repositioned, and strip centers continue to add in more experiential concepts, along with service needs and necessities that can’t be easily duplicated online.

Knowns and unknowns

There are still a number of unknowns and unanswered questions that will need to be answered in the weeks and months (and years) ahead. Those include:

  • Will returning office tenants prefer short-term leases in the face of continued uncertainty, or will they as they move aggressively to lock low rates by embracing longer-term deals?
  • How quickly will hard-hit urban cores recover? Pent-up demand will help, but the pandemic will leave scars in downtowns where companies left or chose to expand elsewhere. The mixed-use dynamism of bustling urban centers will lead to an eventual recovery, but the downtown timeline may lag behind other areas.
  • How significant will lingering employee health and safety concerns be? Most big players are taking a slow and conservative approach to office return timelines (many planning for a late third quarter or even fourth quarter return), which is an implicit acknowledgment of not just epidemiological realities, but the need to give nervous employees time to feel comfortable again.
  • The biggest and most important unknown is what the impact will be of existing and new COVID variants. If the U.S. sees a similar surge that some countries have experienced recently, that could be a setback.

The reality is that despite encouraging signs, we won’t be able to answer the questions above until much later in 2021 or into 2022. The COVID crisis has altered attitudes and perspectives in ways that will persist for quite some time—perhaps permanently. Which is why, despite universal enthusiasm to get back to normal, it’s critical for decision-makers the commercial real estate industry to understand that it will unavoidably be new normal. The recovery is coming—but those who want to be able to take advantage would be wise to remember to stay flexible and empathetic as the industry adjusts to what that new normal will look like.

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