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Key take-aways from the Commercial Real Estate Outlook for 2021

Last spring, the COVID-19 pandemic sent droves of workers home virtually overnight, where many have been working ever since. With the rollout of promising vaccines on the horizon, employers of all sizes are now planning when and how they might begin the process of transitioning their staff back into the workplace and preparing retail and other public spaces for the “next normal.”

Given that remnants of COVID-19 will likely be around for at least another year, the commercial spaces people re-enter will need to be different from the ones they left behind. So, too, will be the expectations of those responsible for leasing, managing and maintaining those spaces. Among the pandemic take-aways for the commercial real estate industry are these six trends:

#1 As leases come due, some tenants may reduce or recalibrate their footprints.

Work-from-home arrangements have generally exceeded both employer and employee expectations.1 In fact, new research suggests employees who divide their work time between home and office are more productive than those who work entirely in the office or remotely every day. Some organizations have signaled a willingness to continue these hybrid work arrangements after the pandemic is over. As their leases begin to expire, some may right-size their office space to accommodate a smaller daily in-person staff.

Retailers, restaurants and other public-facing businesses may also follow suit, downsizing their physical space as more business shifts to online and curbside sales.2 Major manufacturers like Proctor & Gamble are fueling this trend by editing and reducing their product offerings, a practice that began when supply chains grew congested early in the pandemic, according to a recent Wall Street Journal report.2

#2 Tenants returning to the workplace will place increasing value on environmental safety.

Lower staff head counts may not always translate into smaller office footprints. The move to reduce overall square footage may be offset, at least in part, by tenant desire for more private offices and increased space between employees to meet new social distancing expectations.

In fact, a focus on tenant and customer health and safety is likely to become a new post-pandemic (Commercial Real Estate) norm, given heightened awareness of virus transmission and public health predictions of more frequent and severe pandemics in the years ahead. Reducing the likelihood of indoor transmission of disease will likely be especially important to increasing traffic in gyms, restaurants, hotels, stores, entertainment complexes and event venues frequented by the public, especially in the near-term.

#3 Hospitality industry members will need to be flexible to overcome short- and long-term challenges.

The pandemic hit the hospitality industry harder than many sectors, requiring hotels to reduce staff even while increasing their cleaning protocols. Lower-than-average occupancy rates continue, and the industry’s rebound is expected to continue to be uneven, reflecting regional spikes in COVID cases.

Longer term, a return to pre-pandemic occupancy levels will depend largely on an increase in traveler confidence and office re-openings, which will hinge upon widespread vaccine distribution throughout 2021, in combination with greater access to testing and — longer term — growing herd immunity.

In the meantime, many hotel owners find their financial reserves being depleted and may require additional government aid to stave off what could be a coming wave of hotel closings and foreclosures. On the flip side, investment opportunities will emerge for buyers with the capital to scoop up these properties at a discount.

In 2021, look for the hospitality industry to seek additional opportunities to reduce staff, seek more cost efficiencies and pursue greater flexibility. Given shortages of available and affordable housing in some regions, some properties may seek to convert to other types of housing. In some markets, hotels have already partnered with nonprofit and government groups to provide living temporary living space to the unhoused. Other properties have used prolonged closures to complete renovations and reposition their properties. Some owners are also switching from corporate management to franchise agreements that provide hotel operator/franchisees greater decision-making ability.

#4 Property developers and owners may benefit from investing in “healthier” building solutions.

Creating spaces that workers and visitors will feel comfortable entering is expected to require both upfront investment and ongoing maintenance. According to the Emerging Trends in Real Estate 2021 report published by the Urban Land Institute and PwC, some real estate developers have gone so far as to retain infectious disease experts to create health protocols and strategies for their properties and tenants.

The result is expected to be implementation of solutions that promote better air filtration, cleaner surfaces and safer spaces. Marketing strategies may increasingly focus on building features that promote clean air quality and reduce disease transmission.

Touchless technologies are a prime example. Elevators, along with lobby, office and bathroom doors that can be opened and shut using sensors and mobile technologies, are expected to grow in popularity in coming years.

Demand for advanced HVAC systems that recirculate and purify air using ultraviolet light will also increase, and older buildings with operable windows may gain renewed popularity. Hands-free sanitizing stations added to public areas during the pandemic are likely to become permanent fixtures. Sanitation robots may become commonplace.

#5 Changing user preferences may need to be reflected in space design and development.

With more organizations encouraging part-time work-from-home arrangements, building owners and developers who create spaces that promote office-sharing, facilitate remote communications or cater to new retail models may be able to differentiate themselves in the marketplace.

Designs and amenities, for example, might focus more on the needs of newer workers who benefit more than seasoned workers from the on-the-job training and cultural immersion that often depend on an in-office setting. The right mix of amenities, in fact, could help lure reluctant workers back to the office. Warehouses and fulfillment centers, on the other hand, may choose to increase automation to speed online sales, reduce human contact and yield cost and time efficiencies.

#6 It’s time to rethink outdoor spaces, too.

Public health officials confirmed early in the pandemic that COVID-19 is more often spread indoors than outside, where viral particles are quickly diluted by fresh air and droplets fall to the ground, where they can no longer be inhaled.

Many communities have responded by imposing restrictions on indoor events and allowing more sidewalk and street space for outdoor dining and other activities. Similarly, COVID-19 provides property developers and owners an incentive to reimagine their public and outdoor spaces. Expect demand for terraces and other outdoor spaces to grow as employees become more mobile while at the office — after the pandemic is past. It may be beneficial to convert some indoor space to make way for more outdoor business and retail use.

The bottom line: 2021 will present commercial real estate companies with many opportunities most could not have predicted 12 months ago. The challenge will be to choose the investments that address tenant health for the near- and long-term, without compromising the owner’s financial health and cash flow.


Also See:


Sources:
1 https://www.nytimes.com/2020/07/02/upshot/is-the-five-day-office-week-over.html

https://www.wsj.com/articles/retailers-cut-back-on-choices-we-dont-need-three-types-of-red-11605934806


Other sources include:

https://www.pwc.com/us/en/asset-management/real-estate/assets/pwc-emerging-trends-in-real-estate-2021.pdf
Emerging Trends in Real Estate 2021, published by the Urban Land Institute and PwC

https://www2.deloitte.com/us/en/insights/economy/covid-19/covid-19-implications-for-commercial-real-estate-cre.html

 

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