COVID-19 has been one of the most significant issues to impact the commercial real estate market in decades—arguably more than the global financial crisis of 2007. However, to date, the market has held stronger than many initially believed and industry insiders have a positive outlook for 2021 and beyond.
When the pandemic first hit, there was fear and uncertainty surrounding what the future would hold,” said Adrian Kroll, founding partner of Kroll Commercial Realty in East Brunswick.
He said phone calls slowed, and some clients were nervous about staying in deals—there’s no question those early months of the pandemic were stressful.
We’ve never been through anything like this before,” said Kroll. “The initial reaction was fear of what would happen. There was so much uncertainty for what the future held. But it never got as bad as a lot of us feared.
By the summer, Kroll said a lot of concern started to lift, and ever since, things have been trending in a more positive direction. People have learned to live with the pandemic and businesses have proven to be resilient at shifting and accommodating to new requirements or mandates.
Now, with the rollout of the vaccine, there is even more positive sentiment.
The vaccine has given some hope and people are really looking forward to getting back to their normal lives,” Kroll said. “People are very eager to start seeing the impact of the vaccine take effect.
With two vaccines being rolled out and other companies close to the finish line, the long-term picture for the industry is looking brighter.
Widespread distribution may take several months, but the vaccines should help bring the return of many in-person and indoor activities by early summer. Commercial real estate stands to benefit immensely,” said Jason M. Wolf, managing principal of Wolf Commercial Real Estate in Marlton. “Retail stores should start to see larger volumes of foot traffic, hollowed-out office buildings will begin to fill back up with workers, and the hospitality industry will likely see a rebound of vacation-starved travelers. Business travel, however, will take longer to return.
Looking at the Different Sectors of the Commercial Industry
Mandated closures and decreased occupancy requirements hit some areas of the market harder than others. Retail and hospitality have faced the most hardship with so many people staying home or shopping online while, according to Wolf, big-box stores and pharmacies are among the most active lessees.
Eroding occupancy rates and reduced rent collections have pressured rent growth,” said Wolf. “Non-essential retailers, in particular, are seeking rent concessions or deferrals. Essential services and durable good-oriented retailers have shown resilience while small retailers with limited e-commerce capabilities have struggled.
Some segments of the market fared well over the course of the pandemic while others saw high demand and even growth in 2020. According to Steve Richel, principal/broker of record for Richel Commercial Brokerage LLC in Red Bank, the industrial sector is hot, and rent is trending upward.
According to Wolf, the industrial market has been one of the most resilient sectors of the economy throughout the entire pandemic.
Demand for industrial space was robust as firms invested in logistics and industrial functions,” said Wolf. “Social distancing measures have bolstered online shopping and supported already strong demand for warehouses and distribution centers. While Amazon continues to lead leasing activity, third-party logistics operators, home improvement stores, and general merchandisers such as Walmart and Target were also among the final quarter’s most active lessees.
With high-contact activities restricted, Wolf said consumers shifted spending towards items for their home which increased demand for cars, home furnishings, and more. This shift directly impacted the manufacturing industry and the need for industrial space, according to Wolf.
On the office side, Richel said some businesses have struggled more than others, but he believes vaccine distribution may start to fill up empty office spaces again. However, it is not out of the question that some businesses may reevaluate how much office space they need. More folks working from home forced many companies to invest in virtual platforms or do business in different ways—for some, it’s worked just as well if not better, according to Richel. This could lead to some businesses evaluating whether they truly need as much brick-and-mortar space.
Photo Courtesy of Visit South Jersey
Pre-pandemic the demand for office space was strong and outpaced construction for much of the past decade, according to Wolf.
Many businesses are reconsidering their long-term space needs,” said Wolf. “As many tenants cut down on space utilization, many new sublease opportunities have flooded the market with discounted space. This may add downward pressure to asking rent growth in the coming quarters. Although we still believe office space plays a key role in fostering collaboration and productivity, there is clearly some merit to work-from-home employment mix. We expect the integration of remote work to weigh on demand for office space over the long-term, but a rise in space allocated per worker could offset some of the impact.” “For a while, the trend was toward these big open, shared spaces,” said Richel. “Now, I think we’ll see more interest in small office space. There are a lot of people realizing work-from-home doesn’t exactly work for them and they might need a little office where they can go for privacy and quiet. But overall, I would say things are stable right now. And with the vaccine out, I think we can be cautiously optimistic things will improve.
Photo Courtesy of Visit South Jersey
A Positive Outlook for the Future
Looking ahead, commercial agents remain positive about what the future holds. Richel said when looking back on initial fears and predictions a year ago, that it was never “as bad as many of us thought.” He’s remaining optimistic, understanding there could be some long-term repercussions, but hopeful things will continue to rebound. Wolf said commercial real estate’s strong position ahead of the pandemic will help as we come out of it.
Commercial real estate fundamentals had been in a relatively strong position heading into the crisis, which should allow for a quicker turnaround once the pandemic is over,” said Wolf. “Despite the setbacks we’ve seen, the region’s commercial real estate industry has continued to show overall solid fundamentals and the economy appears to have enough momentum behind it to remain in positive territory.
People are itching to get back to their normal lives, according to Kroll. “They want to get back to going to restaurants or going to the gym,” said Kroll. “I believe the renewed interest in what these types of businesses offer the community could be a great thing for real estate.
If there’s a bright side to the worst of times, it’s been that people are more appreciative and eager to participate in everyday pleasures that they once took for granted.
“I think when this country begins to finally feel the effects of herd immunity, and they can feel confident about their safety, we are going to see a robust and invigorating atmosphere,” Kroll said. “I know we’re all looking forward to that day being sooner rather than later.”
