Real Estate Trends

As we enter a new calendar year, the pandemic continues to impact real estate in multiple ways. The primary thesis is that for some real estate sectors, the pandemic has only been a temporary disruption, while for others, it has accelerated preexisting conditions. But even within those premises, there are also sectors that have been negatively impacted but will recover (hotels and sports arenas), those that have benefited in the short term (resorts within driving distance and cold storage for vaccines), those that will benefit in the long term (e-commerce fulfillment centers and cellular infrastructure), and still others that are completely new as a result of this crisis (regional kitchens for food delivery and expanded areas for retail curbside pickups).

The following are some current and possible future trends we should all consider while navigating through the upended world of commercial real estate.

Office

The overriding question within the office sector is what will be the balance between the need for more space to separate employees versus the desire to downsize because of the work from home movement. Additionally, open office layouts may actually continue to exist, but perhaps with fewer shared workspaces. Some larger tenants may even consider full-building leases in order to better control their own environments. Furthermore, companies may be drawn more to single-story “tech flex” buildings, which have no common areas and only self-contained space with private lobbies and restrooms.

It will also be interesting to follow how much corporate real estate managers focus on the landlord’s upgrading of their air filtration systems. Most employees may actually become less conscious over time with what is “out of sight” while focusing more on front and center items such as touchless technology.

The debate is also only beginning regarding employees wanting to work from home. A recent Cushman & Wakefield study found that fewer than 10 percent of employees wanted to permanently work from home, while a third of employees stated they would choose to be at home one or two days a week. One further question, though, could provide even more insight: How much time would they like to be at home if all their peers remain working fully in the office? Undoubtedly, many would change their minds due to FOMO (fear of missing out).

Another important consideration with work from home involves the type of work. “Processing” (e.g., software engineering or mortgage documentation) can more easily be accomplished individually away from the office, while “production” work (marketing, financial, etc.) will need more onsite teamwork.

A recent group of corporate CEOs listed their reasons for wanting their workforce back in the office: innovation and culture; improved talent attraction and retention; supporting the brand; protection of intellectual capital; and, of course, increased socialization and productivity.

Finally, those businesses that do elect to relocate from downtown to the suburbs may emphasize those new locations with city-like “walkability” near food and entertainment amenities.

Single family homes

The higher than expected level of home sales has been one of the most surprising positives of the pandemic. The importance of new home sales cannot be overstated, as each new house provides an average of three “year-long” jobs. The contributions to this trend are: 1) interest rates remaining at historic lows, 2) the homebuyer demographic has been less affected by this “blue collar” recession, 3) people are buying first and second homes to escape city living, 4) the Millennial demographic peak is hitting the homebuying age, and 5) as the economist Peter Linneman recently stated, there is a lot of “unintentional savings” from the lack of restaurant visits and missed vacations, etc. These funds can now be used for deposits to purchase all those new homes.

In addition, the pandemic’s influence will encourage new homes to include more space for offices, will be Wi-Fi certified, and could potentially have areas for the owner’s parents who will be more inclined to age in place.

Retail

The retailers with the pre-existing conditions are the ones that will be hit the hardest. The survivors will be those retailers that provide goods and services that are consumed onsite. Examples are restaurants, gyms, entertainment, and even doctor’s offices (“medtail”). Apparel will remain challenged but not obsolete, as most retailers know it is difficult to be successful without some brick and mortar presence.

A continuing trend with brick and mortar stores is to provide additional online order pickup locations. This has already extended to restaurants, as people are becoming more accustomed to picking up food once or twice a week to eat at home. Certain large retail property owners may even follow Simon Properties’ strategy of owning rather than simply leasing retail operations. Simon Properties has purchased Aeropostale, Brooks Brothers, Lucky Brand, and J. C. Penney.

Finally, retail will not completely die; in fact, every region will continue to have at least one enclosed mall, as people still want, at times, the experience of physical shopping.

Hotels

Hotels arguably provide the best definition of “disrupted.” Travel will, of course, return, but there may be some long-term momentum loss, as businesses have grown more accustomed to Zoom calls in lieu of in-person meetings. Thus, there may be an erosion with the small meeting business, as groups will still meet, but possibly fewer times in person. Large conventions cannot be easily replicated virtually and should return to near pre-pandemic levels. Corporate and leisure travel will be slow to return until there is confidence in the entire travel experience. Even if guests are satisfied with a hotel and its cleanliness, they may still hesitate to travel if they are uncomfortable in airports, airplanes and highway service stations.

The back and forth changes with travel restrictions have also made planning difficult. In fact, most hotels are experiencing a “narrow booking window,” sometimes as short as one to two days. This is primarily because customers, even with knowledge of full cancellation policies, are still unsure about possible future shutdowns as well as knowing that there will always be “room at the inn” during this crisis.

The hotels that have found some success amidst the pandemic are the leisure resorts within driving distances of major markets. Brand hotels have also been able to inspire more confidence with cleaning standards, but, again, not nearly enough to avoid financial challenges.

Big-city hotels remain the most challenged, as they lack the international and group business, and many travelers want to avoid urban density. Limited service suburban hotels are experiencing an advantage over full-service properties, as guests feel more comfortable with the smaller lobbies, fewer elevators, and lower perceived interaction with other customers.

Finally, many hotels will move toward self-automated kiosks and text communications with their guests, particularly with scheduling gym appointments and notifying guests of openings of tables in the restaurant.

Industrial

Distribution and logistics companies are mitigating their supply chain risks by becoming more domestic or at least more redundant with strategies such as “China Plus One.” In addition, they are creating more slack within their existing systems by providing additional inventory, and thus, less “just in time” and more “just in case.” This redundancy should provide additional demand for industrial real estate.

With the partial shift away from China, manufacturers west of Singapore may use the Suez Canal more often and thus now enter through the East Coast, creating a potential partial shift away from the traditional West Coast markets.

Because e-commerce involves increased variety of items and less bulk packaging, it can require as much as three times the space of traditional warehousing for the same amount of sales volume. Also, with customers demanding quicker deliveries, retailers may shift towards using more air cargo, which would benefit industrial players near regional airports. “Last mile” facilities are also expanding their land requirements to accommodate the new battery of individual delivery vans and parking for their expanded “pick and pack” workforce. In the past, industrial users were also mostly located away from cities and near major highways, but now distribution centers are migrating to be near “rooftops,” ironically exactly what retailers were looking to do 50 years ago. With the higher price of land near cities, developers may look to further increase their buildings’ ceiling heights, which could someday lead to rents being calculated not by square footage, but rather by cubic yards. We may also start to see a trend toward “warerooms,” smaller warehouses located near the residential customers.

A further transformation may occur with the combining of distribution and retail locations. Retailers could adjust their buildings mix seasonally by reallocating each store as either a full showroom, a partial showroom with shipping in the back, or yet another operation as only a warehouse replenishing the other stores’ stock and/or fulfilling the retailer’s e-commerce orders within the region.

Finally, the industrial sector is strong, but there are still challenges with older, small-bay industrial buildings, whose tenant base may be experiencing financial challenges. In addition, highway, rail, and airport infrastructure are very important for this sector, and without government dollars from future stimulus packages, the supply chain and subsequent growth of the industrial sector could be negatively impacted.