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A look at the commercial real estate market amid the COVID-19 pandemic

The coronavirus crisis has negatively affected the commercial real estate market more than it did residential real estate. With temporary closures and stay-at-home orders in place, many businesses, particularly those in retail and hospitality, were severely affected. According to the National Association of Realtors’ “Next Up: What’s the Data Say” report, as of April, 2020, all commercial real estate sales declined by 79% year-on-year.

However, as the economy starts to reopen and the government intensifies its support for businesses, recovery appears to be on the horizon. For their part, businesses are also learning to adapt to the new environment, and are taking measures to help themselves not only to survive but also to thrive under the present conditions.

If you’re a commercial real estate owner or investor, look into practices, information, and expert advice that can help set you off on the road to recovery. We gathered these important information and industry highlights for your reference.

Multifamily sector

Here are some of the latest data based on the NAR report:

  • For Q2 2020, multifamily property sales in the country dropped by 81% year-on-year
  • There was also an 81% year-on-year decline on leasing volume
  • The volume of sales went down in primary cities and municipalities like Manhattan, San Francisco, and Chicago, but went up in secondary/tertiary cities
  • Gateway cities saw net move-outs in Q2 2020, while sunbelt metros saw an increase in leasing activity
  • As of June, 2020, rent payments made were at 95.9%
  • Generally low vacancy rates throughout the country are seen to sustain rent growth
  • Multifamily construction starts went down from 628 in January 2020 to below 300 in March 2020, but has inched up to 355 in May

The noticeable increase in leasing activities in the secondary and tertiary markets and the decline in primary markets highlight the need for quality affordable housing. With remote working diminishing the need to live close to offices, many are taking the opportunity to move to the suburbs and more affordable cities where they can rent or buy larger homes for less.

As the demand for affordable housing is emphasized by the pandemic, it has been deemed an essential service and is exempted from the moratorium in housing construction around the country.

Despite the decrease in rent payments year-on-year, the vast majority of renters still made partial or full payments as of May, 2020, highlighting how rent is a priority in household budgets.

Office sector

The latest data from NAR include:

  • In May, 2020, the volume of acquisitions for office spaces went down 82.2% year-on-year
  • As of the end of Q2 2020, year-on-year office occupancy loss was 14 million square feet. Year-on-year gross leasing activity loss was 53%.
  • Leasing activity declined in primary markets but increased in secondary/tertiary markets. NYC tops the list of losers with a net decrease of 5.4 million square feet
  • Asking rents fell slightly by 0.2% in Q2 2020
  • Office-using payroll jobs increased by 466,000 in May and June, 2020

Remote working is seen to continue, at least for a certain percentage of the workforce, even after the pandemic. However, not everyone can work from home, and as the data show, the most recent trend is for an increasing number of office-using payroll jobs.

The pandemic has highlighted the need to adopt technology and practices that can enhance safety from infections and diseases. Open floor plans may have become a thing of the past. Moreover, buildings that do not adopt technology-driven safety measures, such as touchless elevators, air and water quality monitoring, and airflow and circulation improvements, may soon find themselves obsolete.

Retail sector

The latest data from NAR include:

  • The number of retail employees took a nosedive from March to April, 2020, but have seen improvements since, rising from 13.287 million in April to 14.399 million in June
  • Monthly sales for retail and food services have been trending upward from April to June
  • Food delivery services had a sharp spike from March to May, but contracted slightly from May to June
  • Retail sales transactions fell 83% year-on-year

The continuing decline in retail activity may lead to the permanent closure of numerous small businesses. However, the upward trend in food services and drinking places from April to June may signal a resurgence of these activities as the reopening of the economy intensifies.

Since the start of quarantine and other COVID-19 mitigation orders, there has been an unprecedented rise in e-commerce activity, especially for essential items like groceries and food. Despite this, construction of brick-and-mortar stores have only gone down slightly. Additionally, while retail rental payments dropped drastically from March to June, they have been steadily coming back up since April. After all, certain services, such as haircuts and bike repairs, can only be done in person.

These trends suggest e-commerce and physical stores are complementing rather than competing platforms. To encourage customers’ return to physical stores and establishments, experts say these businesses should go beyond acting as a distribution center for goods, and should provide unique, sensorial experiences that customers cannot get from online transactions. In addition, brick and mortar establishments should create a safer environment where customers can feel protected from infections and health hazards.

While the commercial real estate sector has become more complex, numerous opportunities have opened for savvy investors, especially in major urban centers like New York. However, it’s important to work with an experienced real estate agent who can help you navigate the market and identify the right options.

If you need more information and tips for buying commercial property in New York, schedule a consultation with me today by calling 917.741.4296 or sending an email to info(at)alexandermeskouris(dotted)com.