Commercial Real Estate in Trouble

Since March 2020, we all have seen ourselves working from home more comfortable. This has led companies to have the biggest offices in the world realize something that now puts the commercial real estate market in trouble – reducing their investment behind office spaces and converting permanent employees into work from home (permanently).

Even though work from home started way before the pandemic did, the biggest companies have preferred working in the traditional way. Take a look at it this way – from where does the real estate sector generate its maximum revenue?

The answer is – companies like Google, Apple, Microsoft, and Amazon who spend a fortune behind lavish office spaces and also from companies who pay office rent regularly. However, these companies have all now realized that if employees are showing greater productivity by working from home, why spend so much behind buying and maintaining a lavish office space?

How Did the Commercial Real Estate Market Fall?

At the beginning of the pandemic, companies made arrangements to manage remote working. As a result, any project on a new office was bound to pause. Meanwhile, companies who were paying rent for their offices became irregular. This is where the fall of the commercial real estate sector began.

Starting with the real estate investor segment, in the first 6 months of 2020 itself, the global commercial real estate investment has fallen by 29% to $321 billion. The commercial real estate property prices are falling even in the costliest places of the world.

In the US, the market has fallen by 37% in the last 6 months. Meanwhile, the volume of investment in the Asia-Pacific region has dropped by 32% and the EMEA region by 13%.

Coming to rent payments again, as of June 2020, only 19% were receiving their rent payment on time. 59% received delayed payments, and another 19% terminated their leases for not receiving any rent due to financial crunch.

What About the Retail Sector?

Well, surely this year you’ve made more online purchases than going to the store. For a long time, in the middle of the lockdown, the brick and mortar stores have suffered to make sales. As a result, their supply has also reduced drastically.

The demand for physical stores is likely to increase in the health & personal care segment and the entertainment sector. However, there has been a decline in demand for physical stores for the fashion segment as the online market seems to be taking over. Meanwhile, the F&B segment, the sports category, and luxury stores tend to remain stable.

Coming to rental growth, it has been declining currently but may stabilize or improve after the pandemic as the situation starts improving.

Thus, you may say that currently, the retail sector has been affected, but not all segments here are likely to suffer in the future. The worst affected here are the small stand-alone stores that have been taken over completely by online shopping.

How Does the Current Situation Lead to a Scary Future for the Real Estate Industry?

As sales went down, offices were shut for months, and several businesses made efforts to work from home, here’s what they realized:

· Work from home is possible and in fact, proves to be more productive for a lot of tasks.

· By getting more and more of remote work, expenses behind maintaining an office and providing its facilities to employees have gone down.

· Thus, converting full-time employees into full-time remote workers will substantially reduce the company’s overhead costs for good.

This is the reason why a lot of tech giants who have the software infrastructure are already making efforts to permanently make their employees work from home.

Meanwhile, many small retailers have shut down already due to the lockdown. What they might find more feasible to survive is to sell online through retailers like Amazon.

What is Likely to Happen After the Pandemic is Over?

Recently, CBRE had conducted research according to which there is likely to be a transformation in workplaces. There were 126 respondents, 21% of which belong to the financial sector, 16% belong to tech, media, and telecom, 13% belong to industrial & manufacturing and 11% belong to business & professional services.

Here’s what they said:

· 70% of the respondents will convert some of their workforces to full-time remote employees.

· 61% will convert some of their workforces to part-time remote employees.

· For 41% of the respondents, the importance of a physical office reduces slightly.

· 75% of the respondents have either paused or canceled their plans of expansion (for physical offices).

So, what do you already figure out from here? Clearly, there will be a reduction in real estate purchases for commercial spaces as well as renting of offices. This will, in turn, lead to a fall in prices for real estate properties as well as office space rent.

Here’s how the transformation is likely to take place in the commercial work environment:

· Companies might move from the hard-core urban areas to suburban areas.

· More and more flexible and reconfigurable workspaces are likely to be made.

· A lot of permanent employees are likely to work from home.

· Most new employees may be hired remotely from the very beginning.

· The demand for co-working spaces may reduce the demand for small office spaces, affecting rent.

· There will be amendments in the lease terms for the current traditional office spaces as they will turn into a more collaborative space.

There will be a substantial increase in online shopping, but the demand for physical stores may not go completely. Hence, that part of the commercial real estate sector might be less affected.

On a Final Note

The commercial real estate sector may have to revise their investment planning to survive the changing environment. As the importance and demand for physical offices and stores will reduce, so will the property and rental value decline.

The worst affected here would be small office spaces, as they are more likely to shift to collaborative working spaces or remote work. At the same time, large and luxurious office spaces may also lose demand as companies shift to remote working from the traditional office environment.