There’s no denying that the COVID-19 pandemic and the serious hit it’s brought to the U.S. economy has slowed commercial real estate activity across the Midwest. But there’s no denying, either, that not every commercial sector has taken the same hit.
In an interview with Midwest Real Estate News, a trio of CRE pros with Kansas City, Missouri’s Block Real Estate Services, spoke about the differing impacts the pandemic has had on the multifamily, industrial and office markets. Two of those three markets – multifamily and industrial – have held steady and have even seen some growth in activity during the pandemic. The third – office – might be at the beginning stages of a major shift as companies debate how many of their employees will work from home on a full-time basis even after COVID cases start to drop.
Scott Cordes, senior vice president and chief operating officer of Block Real Estate Services; Aaron Mesmer, senior vice president for development and acquisitions with Block; and Chandler Thompson, vice president with Block Multifamily Group, all agreed that the commercial real estate industry has changed dramatically since mid-March when states began issuing stay-at-home orders.
They agreed, too, that the commercial real estate market won’t be returning to the old normal anytime soon.
“The different property types – industrial, office, multifamily, office and retail – are all responding in their own unique ways,” Mesmer said. “You can’t really say that commercial real estate is reacting in a specific way. You have to break it up into the individual sectors because each property type is experiencing the pandemic in a different way.”
Industrial still the star
Mesmer pointed to the industrial sector as an example. In the Kansas City region, and across much of the country, this sector has seen an increase in demand, thanks largely to the growing number of consumers who are now doing more shopping online.
Supply chain logistics have suddenly become even more important to the lives of Americans, Mesmer said. There’s even more focus on solving for the last-mile problem, getting goods to U.S. consumers in less time.
“Generally speaking, industrial is doing pretty well,” Mesmer said. “On the flipside, retail, and particularly retail that has been impacted by the inability of people to congregate – movie theaters and other event spaces – have seen a far greater negative impact.”
“You hear it every day: It is ecommerce that has keep industrial going strong,” said Cordes.
Cordes said that he regularly talks with ownership groups of mainly industrial products across the country. Most say they have been surprised at the lack of rent relief requests they’re received from tenants.
That’s a sign that the industrial sector continues to chug along even during the pandemic.
“A lot of the success of industrial remains tied to ecommerce,” Cordes said. “Ecommerce was growing at an impressive, steady rate five or six years ago. But today, the growth is really amazing. It has grown exponentially in the last four or five months.”
A new world of work?
And office? Mesmer said that sector has been particularly interesting since the pandemic forced companies to send most of their workers into work-from-home mode.
Before the pandemic hit, companies had been looking to use as little office space as possible. Now, though, those smaller offices might not look as attractive. Might companies now start looking for larger offices, spaces in which employees can spread out?
Or will companies go the opposite way, offering flexible work schedules and allowing a greater number of their employees to work from home? If they do this, they might not need as much office space.
“It’s an interesting question,” Mesmer said. “Working from home might be OK for some. But some can’t do it. They have spouses, kids and dogs at home. It’s not an environment that is conducive to work. As we move forward, different companies will approach this differently. On the leasing side, a lot of office decisions are being put on hold today. Companies are waiting until there is more clarity, until they can better figure out where we are going next.”
Ecommerce continues to play a major role today, too, Mesmer said. Online shopping had long been on the rise, of course, long before the pandemic hit. But COVID-19 has convinced even those who weren’t fans of online shopping to embrace ecommerce.
This is especially evident when it comes to grocery purchases. As the pandemic hit, a significant number of consumers turned to ecommerce sites to purchase their food for the week. Many of these consumers had never shopped for groceries online in the past.
“A lot of people have now gotten accustomed to having their groceries delivered,” Mesmer said. “People are learning to like the convenience of not having to go to the store. The overall adaptation has taken hold more in the last three or four months.”
Making adjustments in multifamily
Thompson with Block Multifamily Group said that her division adapted quickly to the COVID-19 pandemic. This meant almost immediately establishing virtual tours and videos for those who wanted to rent the group’s multifamily properties but who couldn’t actually visit apartment units in person.
Employees of the multifamily group have also focused on almost over-communicating with tenants, Thompson said.
“That resolves a lot of anxieties and makes them feel safer,” Thompson said. “We want them to know that we are working as hard as we can to make sure they are feeling as safe as they can in their homes during this time.”
The pandemic has brought plenty of challenges to the Block Multifamily Group. Because so many people are staying at home, work orders have increased significantly. At the start of the pandemic, the group’s maintenance staff was only taking on emergency orders.
Block Multifamily Group, meanwhile, created videos teaching residents how to handle simple maintenance tasks, such as changing an air filter, on their own. Building maintenance staff also spent time on the phone with residents talking them through how to tackle these simpler, non-emergency maintenance issues.
The group’s maintenance staff is now working through even non-emergency work orders in order of priority and date submitted.
“During those first couple of months, it was very difficult,” Thompson said. “But we are catching up now.”
Then there’s the financial challenge. Block Multifamily Group has not increased rents as they renew leases. This is a change: Before the pandemic, the multifamily sector in Kansas City – as it has been across the country – was strong enough to allow for regular rent increases when tenants renewed their leases.
Since the pandemic hit, Block has not been boosting rents for renewing tenants. This just isn’t the right time for that.
“We want to remain sensitive to residents and their financial state during this time,” Thompson said. “We have taken a little bit of a hit financially in regard to the waiving of late fees and not increasing rental rates with our renewals.”
Block Multifamily Group is also working with tenants who are struggling to make their rents each month. Collections have remained surprisingly high at Block properties, Thompson said. The division, though, has seen a slight increase in delinquency rates.
“We have residents who are having a more difficult time, and we are working with them on solutions,” Thompson said. “Others are just fine and continue to pay regularly. We are working through the collections issues.”
Given all this, what does the future hold for commercial real estate? That’s a tough question. Mesmer said that the national economy has been largely propped up by the stimulus checks, PPP loans and enhanced unemployment benefits provided by the federal government.
Those measures have been vitally important to keeping the economy afloat. But they also mean that the country probably hasn’t seen the full financial impact of the pandemic yet.
“We have seen some delinquencies and some tough situations already,” Mesmer said. “But I don’t think we’ve yet seen the full economic impact.”
Consider the multifamily market. Younger tenants might begin moving back home with their parents as a way to save money. Others might move from single units to double units so they can share rent and expenses with a roommate.
“You haven’t seen people do some of the things necessary yet to save money,” Mesmer said. “That is an impact that will come.”
The future, then, depends largely on what additional financial assistance the government might provide and how long the pandemic will continue to spread across the United States.
In the meantime, Thompson said, people will continue to hunker down in their homes and do whatever they can to make their home lives more enjoyable and stress-free.
“The one thing people can control right now in an out-of-control environment is their home life,” Thompson said. “They are shopping for things that make them happy in their home. They want to make sure their home is a place where they can feel safe.”
To help in this effort? Block Multifamily Group is holding a growing slate of online events, everything from trivia nights to chef-led cooking demos.
“We are staying connected with our communities,” Thompson said. “We are making sure that although we can’t physically host resident events, we are connecting with them virtually. Everyone needs that connection today.”