The Fallout of the Covid-19 on CRE Sectors: the Future of Commercial Real Estate

September 13, 2021
15 min

The majority of the world has been home for the past year, and real estate is one of the sectors most affected by the Covid-19 pandemic. Even a cursory observation of the news will inform you about the retailers and restaurants shutting their doors as a result of the pandemic and the restrictions imposed by governments. In our article, we will tell about our observations of real estate market 2020-2021 trends and the overall future of the commercial real estate.

Closing retailers is only one of the more obvious effects of the pandemic and retail real estate is not alone, the other four major asset classes (office, industrial, multifamily, and hotels) have also been impacted. Perhaps surprisingly, the effects are not all negative, more accurately, it could be described that the pandemic has accelerated some of the trends that were already taking place.

Some of these trends have likely advanced by 5 or 10 years if one were to try to envision the timeline without a pandemic. The pandemic is likely to be the catalyst for one of the largest shifts in commercial real estate market fundamentals.
In this blog post, we take a high-level view of how certain trends in commercial real estate have accelerated or changed due to the pandemic and the likely effects on these sectors going forward.

Additionally, we’ll discuss how the pandemic created the need for all businesses to have the right technology in place to meet the unexpected events that could influence business continuity to mitigate those risks and continue operations during periods of significant external shocks.

 

Why Now Real Estate & Technology Come Hand-in-Hand More Than Ever Before

 

While the pandemic has been the catalyst for significant changes to the real estate market, technology has also been the key factor in every trend discussed in this article. Whether it be the shift to e-commerce or the ability to work remotely. Real estate is an industry that highly values in-person meetings, and – at the risk of over-generalization – it has often felt like it has lagged when adopting the latest technology.

In 2021, based on Deloitte research, most real estate brokers (56%) responded that the pandemic had revealed shortcomings in their company’s digital performance and had an impact on their plans to transform.

Despite the current technology transformation urgency, only 40% of brokers said their firm has a defined digital transformation road map and have launched reshaping of business processes, job roles, and skill requirements to fully introduce technology and tools.

On top of that, only 45% of commercial real estate brokerages plan to invest more in the cloud, artificial intelligence (AI), robotic process automation (RPA), and digital channel development in 2021.

At the onset of the pandemic, companies that were not prepared for global lockdowns and quarantines were forced to reach for the quickest and easiest tools they could implement to go from a full-time office to a fully remote workforce in a short time. These were not always the best solutions available. The transition for many companies was not smooth, but nimble and progressive IT departments adapted and instituted solutions to face these challenges.

 

 

It has been over a year of the pandemic, and at this point, most companies have solutions that allow them to work reasonably efficiently. Probably the most important takeaway is that this pandemic has shown the need for all businesses to have continuity plans and the right technology in place to allow them to continue their operations even despite significant external shocks.

Many will have a new appreciation for adaptability, implementing the right tools and technologies, and constantly considering alternatives to the way they are used to doing business, and these traits will likely become hallmarks of success for many companies going forward.

As noted above, and with this pandemic dragging on for over a year now, and companies have a lot to consider when it comes to key decisions surrounding their employees returning to work, workplace planning, and remote work options, but, perhaps, most critically, making sure they have the right technology to ensure their business continues uninterrupted as these dynamics continue to shift.

Remote work is almost certainly here to stay in some form in most companies, so ensuring all systems are working seamlessly will be one of the keys to success going forward.

Additionally, considering whether your business has the right technology and tools it needs to work as efficiently as possible during another external shock, or if it moves to an increasingly remote model, is another key consideration.

If you are not sure where to start the digital transformation of your commercial real estate business or need qualified help with designing your individual roadmap, we, at Ascendix, are always ready to drive you to the technology evolution of CRE agency.

For almost 15 years, we are a Technology Consultant of choice for almost all top commercial real estate companies & single brokers and have solutions for:

  • Sale/Tenant Reps
  • Lease Administrators
  • Capital Markets & Commercial Mortgage Banking Brokers
  • Investment Sales Reps
  • Property Managers
  • Property Owners & Operators
  • Development & Construction Firms
  • Retail Sales Brokers
  • Land Brokers
  • Organizations with Large Commercial Real Estate Holdings

We specialize in numerous professional services for CRE Tech, Prop Tech, and Con-Tech sectors like:

 

Commercial Real Estate CRM Implementation, Configuration, Customization, and Integration Services

 

Ascendix Technologies has been in the CRM business for 25 years and can complete any, even the most sophisticated projects. We are certified Salesforce and Microsoft Dynamics 365 Partners and have practical experience with all dominant CRM systems on the market.

Add to this our CRE tech expertise and you’ll understand why brokers choose us as their CRM services provider. We also specialize in developing custom CRM software from the get-go.

 

Commercial Real Estate Custom Software Development

 

We’ll create your custom commercial real estate software and commercial real estate apps to streamline your important business processes. We can help you with automating reporting, branded reports & brochures generation, event management, secure deal & collaboration rooms creation, and contract & document management.

 

CRE Tech Software Solutions

 

We can create interactive stacking plans, showcase properties on the map, synchronize your CRM and your website to automatically publish property listings to your website, or develop almost anything your CRE brokerage might need.

Besides that we have created our own commercial real estate software that we can easily adjust to your specific corporate needs:

 

 

Overall Impact of the Covid-19 on Various Real Estate Segments

 

The current real estate market for investors and users can be characterized by apprehension. Investors and users – the ones that have the ability to do so – have entered a holding pattern, taking a wait-and-see approach while the governments of the world work out their response to the pandemic.

How COVID-19 Impacted Commercial Real Estate Transaction

How COVID-19 Impacted Commercial Real Estate Transactions

 

The National Association of Retailers (NAR) reported a 28% year-over-year decrease in commercial property sales in Q4 2020, not to mention even more severe decreases during Q2 2020 and Q3 2020.

Based on the same report, it is expected that office (-6%), hotel (-5%), and retail (-5%) properties sales will undergo the most significant drop. On the other hand, the least vulnerable will be land (-2%) and apartment buildings (-2%) sales sectors.

2021 Outlook of the Dollar Sales Volume of Commercial Real Estate Transactions

2021 Outlook of the Dollar Sales Volume of Commercial Real Estate Transactions

 

The long-term effects of the pandemic are still opaque, and market participants have not been helped by the inconsistent, haphazard, and contradictory approaches taken to limit the spread of the pandemic. However, that it has been a long time since the world had to face a serious pandemic of this scale.

With this in mind, it should also be noted that the pandemic has drastically altered how many users think about their space and, therefore, how investors need to consider the future of each asset class.

While some market participants have the ability to wait until the outcome of the pandemic becomes clearer, retailers and restaurants, which require a steady flow of consumers, typically do not have this luxury.

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What Real Estate Submarkets Have Suffered the Most from the Pandemic?

 

Retail is probably the most negatively affected sector by the pandemic: forcing consumers online in addition to closing many shops and restaurants for lengthy periods of time due to social distancing measures.

Overall retail sales in the US reached $1,581.4 billion in Q1 2021, up 7.8% from Q4 2020 and up 16.8% on a year-to-year basis. Q1 2021’s 7.8% quarter-to-quarter is the second major rise for any quarter for which is only behind Q2 2020’s historic 12.1% change.

Total Retail Sales Change

Total Retail Sales % Change

 

E-commerce retail sales, on the contrary, reached $215.0 billion in Q1 2021 and it reflected 13.6% of total retail sales. And e-commerce’s share of overall retail sales continues to experience a notable surge because consumers are getting more comfortable with purchasing online and receive the goods they look for in a much quicker and efficient way. And the COVID-19 pandemic has only expedited this tendency.

Quarterly E-Commerce Total Retail Sales Since Q1 2019

Quarterly E-Commerce Total Retail Sales Since Q1 2019

Before the pandemic, brick-and-mortar retail was already in decline with the growing dominance of online retail was already an established trend, possibly except for service retailers. America’s malls were already dying, with some being converted to other uses like conversions to Amazon warehouses, and the pandemic has aggravated retail’s challenges.

Total Retail Sales Change in Millions

Total Retail Sales % Change in Millions

 

In the first few months of the pandemic, many independent stores and restaurants failed and several weaker retailers went under. The effect on retail real estate has been significant and the outlook does not provide much hope: consumers will return after the pandemic, but they are also now comfortable with buying even more products online.

Retail is likely to remain out of favor with investors and the future of retail will require mall investors to examine the highest and best use of the underlying property. It could be a combination of retail with residential or mixed-use properties, possibly including warehousing, distribution, or fulfillment (including last-mile delivery) to satisfy the growing demand from e-commerce.

What About the Future of the Office Real Estate Sector?

 

Commercial Property Purchases 2019 vs 2020

Commercial Property Purchases 2019 vs 2020

 

While not nearly as affected as retail, the office real estate sector is also being reshaped by the pandemic. Work-from-home was becoming more popular before the pandemic, companies at the leading edge of this trend realized that it benefited the employee improved work-life balance and the company by reducing office space requirements. However, the majority of companies still operated with full-time office employees.

At the onset of the pandemic, companies with no work-from-home policies instituted such measures nearly overnight. Now it has been over a year, and some office workers have yet to return – many do not want to. Notably, large tech companies like Shopify and Twitter have announced that they will move to an entirely remote workforce. Surveys have shown that the majority of employees want to remain entirely remote or want some level of flexibility to work from home a few days a week.

For employers, shifting to a remote or partially remote workforce is likely to have a material impact on their office space requirements. A predominantly remote workforce means a limited need for office space, while a flexible, part-time, work-from-home policy also reduces the need for office space: once the need for every employee to have a desk is eliminated then office planning becomes more flexible.

Commercial Property Acquisitions in 2020

Commercial Property Acquisitions in 2020

One model is to utilize open layouts and provide workers who only work in the office part of the time with different options for a work setting, including the option to book their workspaces, while those that are always in the office get permanent assignments.

Overall, companies that are intending to have a majority office-based workforce are going to have to get more creative about the amenities they offer to compete with work-from-home options to convince employees to return to the office.

The broader implication of these changes is that companies are likely to be able to streamline office planning and reduce their space requirements.

The effect of the pandemic will take a while to be seen in the office sector, as barring defaults and tenant failures, most tenants are still locked into leases, and are still considering how the pandemic and work-from-home will affect their future space needs.

As a result, the office has not seen a significant demand reduction, but renewing tenants are increasingly asking for shorter-term, more flexible leases. and over the coming years, there could be increased vacancies as businesses redesign and deploy their new office space strategies.

And What Is the Future of Industrial Real Estate?

 

Industrial Sales Transactions

Industrial Sales Transactions

 

Industrial real estate has become the star sector during the pandemic and investor interest in the asset class is stronger than ever, primarily due to user demand from e-commerce companies. The rising e-commerce that is devastating retail is also fueling the rise of industrial distribution.

E-commerce companies have a massive need for industrial distribution space, particularly space that is close to their consumers. Industrial demand is so significant that the highest and best use of some former retail space is industrial logistics space.  As noted above in the retail summary some disused malls are being converted to distribution centers.

Near-urban, last-mile, industrial distribution is required servicing the rise of on-demand delivery retailers that provide necessities like groceries. Other industrial space users include dark kitchens, which are delivery-only restaurants that operate through delivery apps like Uber Eats, Glovo, and Deliveroo (all services that became much more popular during the pandemic).

These on-demand delivery retailers value proximity to their customers to be able to deliver within minutes of an order. With the rise of on-demand delivery retailers, last-mile logistics properties are becoming an important sub-class of industrial distribution, a trend that Blackstone has already hopped on, and industrial overall is expected to remain in demand from investors and users as the growth of e-commerce continues.

 

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And a Few Words about The Hotel & Hospitality Real Estate Sector Future

 

Resorts and hotels are another real estate sector that has had a rough go of it during the pandemic. With the onset of pandemic-related travel restrictions holiday travelers disappeared overnight and businesses restricted their employee’s business travel for health reasons. Many hotels and resorts have shut down indefinitely to save on operating costs until regular travel is restarted.

Once pandemic restrictions are lifted hotels and resorts are expected to see a significant resurgence from vacationers with significant pent-up demand, but business travel is likely to be slower to return to previous levels. The use of videoconferencing was already increasing before the pandemic, but the pandemic has made it a necessity and it is now used by nearly every work-from-home employee.

Similar to the effect of remote work on office demand, increased use of videoconferencing and meetings with tools like Microsoft Teams, Zoom, and other networking programs are likely to reduce the long-term demand for business travel. Companies are seeing first-hand that they can cut costs by using these remote conferencing tools and limiting expensive flights and hotels for their employees without a meaningful impact on efficiency.

Consequently, even as pandemic-related travel restrictions are eased companies are likely to revise travel policies with a focus on reducing business travel to save costs if they are still able to meet the needs of the business, and this will likely mean less travel for most companies and fewer hotel stays.

Overall, it is hard to imagine that resorts will see a long-term drop in demand, as vacationers are desperate to return and an increased level of remote work might let remote employees vacation and work at the same time. However, business traveler-focused hotels in city centers and near conference centers could see a long-term reduction in hotel stays if in-person meetings do not return to their pre-pandemic levels.

Monthly Commercial Acquisitions of Hotel Properties

Monthly Commercial Acquisitions of Hotel Properties

 

But even though, as per Real Capital Analytics, commercial transactions across all property types declined 28% compared to 2020, hotel property acquisitions climbed 13%. Purchase of hotels of $2.5 million or over increased 39% in the first few months of 2021 and hotel sales increased for both full-service (64%) and limited-service hotel properties (19%).

Full-service hotels may be more attractive to investors because they offer more revenue segments (convention facilities, spas, restaurants/bars) that are likely to do well once personal and business travel picks up after most of the population is vaccinated by the end of summer.

Acquisitions of Full service Hotels

Acquisitions of Full-service Hotels to Total Hotel Property Acquisition

 

Another possible reason why hotel acquisitions have become so popular with investors is that they can be converted into other uses, for example, multifamily housing. 

Besides that, adaptive reuse is not only economical but also can be more eco-friendly comparing to building new commercial property by reducing emissions and industrial waste. On top of that, new commercial construction is significantly more costly than re-using existing property (by about two-thirds on a per square foot basis).

Now, Let’s Discuss the Future of Multifamily Real Estate

 

One would think that because people need places to live, the pandemic’s impact on multi-family real estate would be limited. However, almost as a side-effect of the effects on other asset classes many traditionally strong markets have been impacted.

We have already discussed the pandemic’s effects on office and retail, but as retailers shut their doors and offices suddenly went dark with most office workers working online, employees working from home set up their work-from-home desks in their apartments.

As it became clear that the pandemic was not going to be a short event, and with no return to the office on the horizon and employees no longer needed to live within commuting distance, many took the opportunity to leave the city and their small apartments that were likely not well-suited to working from home. The exodus of these office workers from small, high-priced units in urban centers has forced landlords to reduce rates and offer additional incentives to keep their properties leased.

The exodus also fueled demand in suburbs and smaller communities where more spacious homes and apartments can be rented for cheaper. This trend has also driven up home prices as some settle down that is not contemplating a return to the city.

Many employers are trying to figure out how to lure employees back to the office, so it is hard to know if this trend will be sustainable long-term especially if employees are required to go to the office several times a week, but if remote work does take hold then employees will be more mobile and the demand for urban multi-family will likely be weaker than before the pandemic.

Additionally, given that a large majority of office workers have now experienced remote work it is likely here to stay in some form, and it is possible that if more employers shed office space due to the shift to a partially remote workforce, then it would also impact the long-term demand for multi-family in larger cities.

And this trend can be already seen now: acquisitions for multifamily properties of $2.5  million jumped to 5% in the first four months of 2021 compared to the same period a year ago.

What is the Future of Commercial Real Estate Then?

 

Expected Change in Dollar Sales Volume in 2021

Expected Change in Dollar Sales Volume in 2021

 

It is expected that commercial real estate transactions will experience a little stronger upturn across some sectors in 2022. For example, brokerages anticipate a small upsurge in purchases of land (5%), industrial warehouses (3%), and Class B/C apartments (1%) in the following year.

However, brokers foresee a decrease in transactions for retail, office, and hotel/hospitality properties. As for land purchases, realtors predict significant sales rise for residential land (8%), industrial land (7%), and recreational land (5%), as well as agricultural land (5%).

Besides that, most commercial real estate analysts foresee prices to increase next year across most commercial property types, except for office, retail, and hotel properties.

In addition, 38% of brokers expect their international commercial property sales will return to their pre-pandemic norm only in 2023 and 3% think that their international real estate business will never return to its norm. And it means that it’s still too early to expect significant sales growth in the nearest future.

However, one of the best hints was given by an actor, Will Rogers, who said: “Don’t wait to buy real estate. Buy real estate and wait.”. Any investment is a long-run process so to reap the profit, you, probably, need to start now.

Another good piece of advice will be to invest and develop new technology approaches in your organization to cater to modern customers’ digital needs. Because, as the tendency shows more and more clients expect from firms more convenient services available from any point in the world like signing digital lease contracts, receiving instant digital invoicing, or the most suitable listings within a minute.

Our team of experienced CRM consultants will help you define your unique transformation path and navigate the CRE Tech world more confidently. We’ll show you how to open new realms of sales opportunities through the automation of mundane tasks and saving your time on more meaningful activities that align with your corporate mission.

Contact us and together we’ll revolutionize the way you do your commercial real estate business.

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