How COVID-19 Pandemic is Changing Real Estate—and Whether Those Changes Will Last

The COVID-19 pandemic has turned the world on its head, forcing many industries to adapt quickly to the “new normal”—especially the real estate industry. Principal and Managing Director of Avison Young, Nick Banks, recently sat down with John VanDuzer, CPA and partner with James Moore & Company. The duo discussed the state of American real estate and what we can expect for the industry as the world anxiously awaits a vaccine.

There’s no doubt that real estate has had to adapt to these sudden, dramatic changes, but not all the news is doom and gloom. In fact, there are plenty of nuggets of good news, if you know where to look. Although the pandemic has thrown a wrench into a lot of commercial plans and industry standards, some companies are actually seeing financial success as coronavirus changes the way we do business in America.

The Real Estate Market Going Into 2020

Deloitte reports that when the year began, “real estate base fundamentals were strong… leasing activity, amount of available capital and strong leverage ratios.” Regarding residential real estate, Bloomberg adds, “fewer exotic loans were available, credit standards were tighter, banks had stronger balance sheets, and the mortgage process had become more transparent.” The homeownership rate was rising close to 2004 levels, and mortgage delinquency rates were down. Unemployment was also down.

Then, the pandemic came to the United States. Millions of Americans lost their jobs and face potential eviction and foreclosure, which has brought uncertainty to the real estate market. However, there are a few winners in this scenario, and it all comes down to adaptability.

Delivery is King During COVID-19

Given shelter-in-place orders, it’s no surprise that any business adapting its model to support delivery and takeout is seeing significant success. With fear of a potentially deadly virus keeping many people indoors and out of grocery stores, there’s been high demand for food delivery.

“n commercial real estate… a lot of food related tenants and businesses have done well. Some have certainly been hurt, but I think food concepts that are drive-through in nature or were delivery in nature, they’ve seen record sales. Grocery has seen record sales,” said Banks. “While a lot of retailers have suffered and a lot of restaurants have suffered, there have been some segments that have thrived and actually done better.”

In fact, the online on-demand food delivery segment is predicted to grow by $104.45 billion between 2019-2023. And with that increased demand comes an increased need for commercial real estate that accommodates drive-up customers, delivery personnel and take-out preparation.

Delivery has also prompted a rise in industrial real estate. Banks cites continued growth in distribution as a reason, especially with e-commerce and other online shopping options. This has made delivery more critical—which in turn results in more big industrial distribution leases.

In other words, delivery is king. Any business that can pivot to a profitable delivery model will have better luck surviving (and perhaps even thriving).

Hotels and Retail are Suffering

Unfortunately, plenty of commercial industries are still suffering—most notably hotels and retail. With traveling and brick-and-mortar shopping curtailed, many independent small businesses are failing and hotels are affected across the board.

“(Hotels) went from record occupancies in almost every market area to almost zero occupancies overnight, and there’s really just no way to prepare for that,” Banks explained. “There has been a lot of fallout with hotel properties.” In fact, the hotel industry has already lost over $38 billion in room revenue alone. And there’s no end in sight.

As far as retail, it’s hard to imagine going out to casually shop for anything, from books to clothing. According to Banks, about two-thirds of our country’s overall GDP is based on retail and consumer spending—with about 60% of that spending discretionary.

“All of that discretionary spending, or almost all of it, stopped on a dime,” Banks said. “It seems like every day we’re picking up a different news article about another retailer that is either declaring for bankruptcy or closing stores. … I think there’s more fallout to come in retail.”

If retailers can switch to an online model, they might not see as severe losses as the hotel sector. Even so, there has already been a significant impact.

There’s no denying that the coronavirus pandemic has changed our way of life. However, businesses that can adapt to the changes are seeing unprecedented success. Ask our real estate CPAs how your commercial real estate enterprise can capitalize on these and other silver lining opportunities.

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