President Biden’s recent announcement that the United States is expected to have enough supply to enable every American adult to have access to a vaccine by the end of May has understandably been met with enthusiasm. For the commercial real estate industry, where the economic shockwaves of the pandemic have had a significant impact, the news came as the latest encouraging milestone and a sign that the light at the end of the tunnel might be growing even brighter in the very near future.
With vaccination distribution fully underway, now is the right time for commercial real estate executives, as well as office owners and managers, to start preparing for their post-COVID comeback.
What will that comeback look like? When will it take place? What thoughts and considerations should commercial real estate decision-makers be taking into account when planning for the remainder of 2021—and beyond? What operational changes will need to be made as workers return to offices, and how will working lifestyles need to evolve to accommodate post-COVID best practices in an office landscape? Which commercial real estate sectors will perform stronger than others, what types of properties will thrive, and what opportunities can we expect to become more prevalent over the next six to 12 months?
At a time when the commercial real estate industry remains in a state of flux, these are critical questions that will potentially shape the contours of businesses, buildings and bottom lines for a long time to come.
Competing pressures
One of the biggest challenges for executives tackling back-to-office plans is gauging just how ready people are to return to the office. Listening closely to what employees are telling you is going to be critically important. There has been a great deal of discussion about the possibility of smaller office footprints and flexible remote-work models—and both will certainly play a role going forward. The collaboration and connection of in-person engagement in a vibrant and bustling workplace is difficult, if not impossible to replicate. People value the creativity, productivity and social dynamics of the workplace, and there is a desire on the part of many to return to normalcy.
Additionally, growing businesses will still need new and bigger spaces. Even with fewer numbers of people in the office, additional space may be required to spread out enough that employees feel comfortable and safe. Some of those expansionary needs may be offset by staggered shifts and other similar solutions, but those considerations raise the issue of having to deal with cleaning considerations that come with shared workspaces. The net result of these competing pressures is likely to be relatively neutral. Demand for new space might be unlikely to surge, but it also seems unlikely that we’ll see a dramatic drop-off in office space.
Safety, space and sanitation
Vaccines or no, many people will feel safer wearing masks—probably for some time to come. For at least the remainder of 2021, enhanced hygiene measures and social distancing are likely to be a workplace reality. It remains to be seen how involved and emphatic employers will be with mandates (which will likely depend primarily on CDC and regulatory guidance), but the need for additional cleaning and safety measures will require businesses to have cleaning supplies on hand.
Employees may be returning to offices, but benching (seating employees at long tables, working side-by-side with minimal dividers) will be going away, and ultraviolet lights and other gimmicky cleaning and sanitation solutions are also likely to lose momentum. One thing that is likely to become a standard best practice is more frequent filter/HVAC changes and maintenance. Despite some speculation to the contrary, I expect meeting rooms, fitness facilities and other communal spaces to remain largely unchanged. That reason being: People like them and want them. More than a few tenants are already making that very clear to landlords.
Segment specifics
In general, we can expect commercial real estate to rebound in a big way as the economy recovers and pent-up demand surges. Once things do start to open up, expect that resurgence to take off fairly quickly. Redevelopment projects and investment opportunities will be more common than new builds, although industrial real estate remains a potent source of ground-up development.
Office renovations or “refreshes” will be common. It remains to be seen if, as office tenants return, they will stick with short-term leases as they try to determine future space needs or will be looking to take advantage by locking in a long-term deal at today’s low rates.
Hotels, which have been hit the hardest, will bounce back as many people indulge the travel bug for the first time in more than a year. Office spaces should be further buoyed by the resurgence of restaurants and normalized cash flow in multifamily.
Underperforming malls will continue to sputter and require repositioning, while strip centers adapt and embrace experiential offerings, service needs and necessities that can’t be filled online.
Unanswered questions
One of the big unanswered questions going forward is how quickly downtown areas will recover. Pent up demand will help quite a bit, but there’s no denying urban cores have taken a significant hit in the pandemic. Some changes will be lasting. In New York, for example, some companies have left for warmer climates or have opened up new offices in those areas.
In general, we can expect the lure of vibrant, dynamic mixed-use urban centers to win out. Downtown recoveries may lag somewhat behind the rest of the industry, perhaps not picking up momentum until 2022—or whenever people begin feeling truly comfortable in subways, packed elevators and downtown crowds again.
The impact of individual comfort levels and concerns about health and safety are perhaps the biggest unanswered question of all. It’s noteworthy that the largest companies, responsible for the greatest number of employees, are generally taking a conservative approach to bringing employees back to the office. Many are currently planning for late third quarter or even the fourth quarter of this year.
The biggest caveat of all: the impact of new COVID variants remains unknown at this time. Some countries are seeing another spike in cases, and something like that could delay the commercial real estate recovery here, too.
While the recovery is already underway, it won’t be until 2022 that we get the kind of clarity we need to confidently say what the new landscape in commercial real estate will look like. The pandemic will shape behaviors and attitudes for a long time to come, and while we all can’t wait to get back to normal, it’s important for commercial real estate professionals to recognize that it will be a new normal. It’s important to continue to remain flexible and responsive in the face of new and evolving realities.
Andy Gutman serves as the president of Southfield, Michigan-based Farbman Group, a full-service real estate firm. For more information, visit www.farbman.com.
