It has been almost a year and a half since the words “novel coronavirus” and “COVID-19” became part of our lexicon. Like every other economic sector, COVID-19 had a significant effect on commercial real estate (CRE). Yes, there have been some challenging moments over the past eighteen months, and everyone has to learn and adapt along the way. But the numbers and the data suggest that even in the short-term, the CRE market is looking good.
If we dial back, global lockdowns led to tens of millions of people remaining at home, sending the CRE market into crisis as offices remained closed (many still are) and shopping malls, restaurants, and leisure facilities were all but abandoned. Months of renegotiating contracts and suspended rent payments followed, causing a knock-on effect for CRE lenders. But the real challenge was less about what was happening and more around what the market didn’t know – simply because not all companies are using their data to create business-driven insights.
One sector within the CRE market would not be deterred. Riding the wave of success the industrial real estate market began experiencing just before the pandemic, it continued to buck the trend. The data points to the fact that consumers packed their shopping bags away and headed online to fulfill their needs for everything from essential goods in the home to clothing and entertainment.
It is important to note that this industry is also used to using its data to help fuel capacity and demand decisions. Think Black Friday, for example, for industrial-scale retailer warehouses. As soon as the data shows a surge in buying patterns, those companies derive insights from their AI-infused analytics to shift goods to their racks and may even rent additional space in these seasonal peaks.
In the case of the pandemic, there was an immediate need for more extensive, higher volume last-mile facilities across the United States, including storage facilities, safety-stock storage, and processing plants. It has been reported that 264 million square feet of new development were completed during 2020, and a further 327 million square feet was under construction. These are numbers never seen before and resulted in the highest annual growth in rental rates ever posted, coming in at an 8.3 percent upturn.
Now, sure, these numbers might not stay this high. But again, smart industry is following the data. The data points to an ongoing online purchasing model driven by consumers’ new comfort level from shopping within their browsers.
The Office Space
However, the bread-and-butter business of CRE realtors, namely office space, is still in flux. While some employees have enjoyed their office hiatus and there was a spike in productivity when the remote-working and work-from-home model first became the norm. The data now points to a downturn in productivity, morale, and communications for those still at home.
If we believe the data (and innovative businesses do), then the pendulum is set to swing again, and companies, if they haven’t done so already, are looking to bring people back to the office. The full view of what this will look like remains a question but is being tested with hybrid models for workers who don’t have to be in the office and flexible environments for those who work better in the office.
The difference, however, will be the shift to smart offices, the creation of hot-desks for employees who have a flexible contract, and smart-office technology to ensure the safety and wellbeing of all occupants. Employee satisfaction will have to be closely monitored, again another opportunity for businesses to start collecting and creating data, even pooling it from their HR solutions, which will help influence future decisions.
Leisure Rebound Slow
Unfortunately, the data around leisure real estate hints that recovery is set to take longer, particularly in the travel sector. Globally an estimated one billion hotel-room nights were unsold in 2020, and the numbers in 2021 aren’t looking any brighter. That is not to say that it is only travel that is limping along; traditional retail and in-person entertainment are feeling the hangover of jaded consumer confidence that is still low and results from some countries still in lockdown.
There is no crystal ball to make predictions for the travel industry. In the mid-to-long term, they are bound to see recovery, albeit a bit slower, like office real estate, and will be tied to innovative ways used by organizations to ensure people’s safety in their spaces. Caution should also be taken by CRE operators who want to hedge their bets on the prospect of industrial real estate. It is easy to become bullish about the long-term prospects, but there may yet be another shift. So, relying on up-to-the-minute industry data to help steer and predict the level of risk accurately before committing to purchasing any asset is essential, especially when assessing an industrial space of 100,000 square feet or larger.
Adapt or Don’t Survive
The pandemic is not the first global event that has sent the CRE market spiraling, nor will it be the last. Back in 2001, the 9/11 attacks on the World Trade Center caused a watershed moment in our collective consciousness and changed the world overnight. The CRE market took a hit, too: office blocks in major financial districts throughout the country experienced much higher vacancy rates in the years following the attack, particularly in areas surrounding trophy buildings. Asset managers had to adapt by implementing measures to maximize the safety of occupants.
The simple lesson is that it is almost impossible to predict a crisis, but how as an industry, you react, adapt, and innovate as a result is what will lead to your success. In the case of the CRE market, the time to look at the data-driven AI-infused insights that proptech solutions can yield has never been more critical. At the same time, technology isn’t going to predict a global pandemic. It will offer the AI-driven insights needed to make better supply chain decisions, help lenders and borrowers better understand risk, identify the hardest-hit markets, and allow businesses to build better resiliency models for the future.
In short, all industry is turning to data to help them make smarter decisions, and there is simply no reason that the CRE industry shouldn’t too.
Iris Cedon is CEO and Co-Founder of Okapi, an AI-based platform for operational excellence. Prior to Okapi, Iris worked at Ness Technologies, where she served as VP Division Manager of BI. Iris holds an MSc degree in Behavioral and Management Sciences from the Technion Institute and is a co-author of the best-selling book “Six Steps to Operational Excellence.”