Which Commercial Property Sectors are Doing the Best During the Pandemic, and Which Ones Are Hurting?
Together with almost every other sector of the economy, commercial property has been disrupted by Coronavirus and social distancing. For many years, the main declining CRE sector has been retail. However, this sector is no longer suffering alone, since the pandemic is hurting most other CRE sectors: hospitality, office, multi-family, personal services, restaurant, entertainment, and construction.
A decline in retail space may result in greater demand for industrial space. For the industrial sector properties, demand for storage space from online stores may continue to increase after the coronavirus pandemic. The online shopping industry has created a strong demand for logistic space and warehouse, increasing record asset values and rental rates for industrial properties, while reducing demand for some retail properties.
However, it’s worth noting that some areas of retail are still doing well. Shopping centers are still open because they have supermarkets that are all trading exceptionally well. The non-discretionary retail segment will probably emerge from this crisis as one of the most resilient commercial property sectors.
The performance of commercial office buildings depends on the underlying resilience of the tenant’s business. For instance, where tenants are government departments and big multinational companies with employees working from home, the effects are likely to be minimal. However, those with tenants whose business model has been significantly disrupted by social distancing are being deeply affected.
The aftershock is likely to affect various types of commercial property differently. Shopping malls will probably take some time to return to full capacity, as people remain worried about their health and need to save their money, especially if unemployment increases.
In the commercial office sector, tenants will probably re-examine the productivity benefits and cost of having employees work from home. We will have to wait and see whether the work from home trend stays after the pandemic is over or whether weeks or even months of isolation will help office employees better appreciate the benefits of having a centralized space.
However, rents and capital values will probably decline across the retail and office sectors over the next year, with a negative outlook for offices’ rental property values. The perspective for alternative asset classes is also not good, since hotels are expected to see a big drop in rental values in the next year.
Again, on the other hand, the outlook for the industrial sector is bright, especially for prime market properties. Expectations for logistics have become positive again, pointing to the changing supply chains and the rising popularity of e-commerce. Data centers also stand out as pretty resilient for now, and rents are expected to remain relatively stable.
Lastly, we have the apartment market. For the most part, they are still doing well, with overall collections down by about ten percent; but certain sub-sectors are already feeling the brunt of the Covid 19 impact, especially student housing, as many universities are closing their campuses and going on-line, many students are choosing to stay home, or just take a “leap year”.
While uncertainty remains high, and significant adjustments are needed, carefully chosen commercial real estate investments will definitely still continue to provide good returns compared to other types of assets. When the crisis is over, commercial real estate will still remain central to our social and economic lives, and that is a given.
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