2020 and the COVID-19 pandemic brought the need for rapid operational change for both businesses and for society as a whole. The sudden need to move operations to a remote space uncovered new ways businesses work to ensure resilience and success—which, in turn, has impacted the way commercial real estate is bought, sold, and used. With a new year ahead of us, the lessons we learned in the past can help us make predictions for how CRE will be impacted this year as companies shift to remote work environments in 2021.
A New Normal
While last year’s shift to remote work was sudden, it wasn’t entirely unexpected—the pandemic only accelerated the trend of companies allowing their teams flexibility to work from home. When COVID initially started, brick and mortar corporate offices were extremely uncertain about whether their teams would be equally productive when working from home. Most companies have been pleasantly surprised by the productivity they’re seeing, and enjoying reduced operating costs of office space.
This doesn’t mean, however, that office spaces are being abandoned entirely. Before the pandemic, we were already beginning to notice a growing trend toward the current workforce wanting to live, work, and play in walkable urban centers in small cities—younger millennials and older Gen Z workers simply do not want to commute from their homes in these urban centers “gateway” office complexes on the outskirts of town. In communities like St. Pete that don’t have the downtown real estate to create Class A office space previously needed by major corporations in a pre-COVID world.
What these corporations have realized because of the pandemic, however, is that their office space needs are changing. Rather than seeking massive floorspace for cubicle farms and single-person offices, they can focus on creating office spaces that serve as flex space for in-person meetings and coworking-style work stations—making downtown centers like St. Pete an extremely attractive option compared to larger metros and expensive, uncomfortable campuses detached from urban centers.
When it comes to properties that banks are most willing to take risk on, a few verticals have emerged as favorites for both new leases and real estate purchases alike. Sectors such as medical offices, clinics, and industrial developments are experiencing immense growth while office and retail space dwindled as people increasingly moved to remote work. On the retail side, in person retail shopping has struggled because of the quarantine trend, where online shopping skyrocketed—which, in turn, has driven up demand for industrial and warehouse space. As we dive into 2021, we should be thinking about how to quickly adapt to this new normal.
If there’s anything we’re sure of, it’s that it requires collaboration on the part of property owners and their tenants to ensure that local restaurants and retail shops are able to remain competitive. We’ve shared some advice in the past about helping local brick-and-mortar survive and thrive through a shutdown: namely, knowing how to adapt quickly, maintaining open landlord-tenant communication, and remaining involved in a community fueled by local business owners.
Digitization
According to Deloitte’s 2021 CRE Outlook, “Rapid digital transformation will likely be needed to build operational resilience, maintain a strong financial position, develop and retain talent, and create an enabling culture.” Many employees are opting to continue to work remotely even after the threat of COVID-19 subsides. This decision isn’t always made at an employee-level, either—several companies have significantly reduced their physical footprint and moved more operations online to reduce cost and improve safety.
In turn, we’re predicting that we will likely see a trend of residents moving out of cities and downtown areas because of the lesser need to commute to work every day, and the demand for residential real estate in Tampa Bay echoes this sentiment. This shift is already noticeable. residential spaces, such as apartment complexes and condo associations, are offering improved onsite office spaces and business centers included in their amenities and built-in workstations as a standard part of each unit’s floorplan.
But with digitization, comes new obstacles. Deloitte surveyed 200 CRE executives and more than half of them believe the pandemic has uncovered shortcomings in their company’s digital capabilities and affected their plans to transform. It will likely become increasingly important to make data-based decisions. Analyzing data such as engagement and performance levels can help leverage more financially successful operations. It is encouraged that companies increase digitization to facilitate productivity and financial stability.
In the remote sector, cybersecurity is another safety concern. We’ve all seen our friends and coworkers on social media seizing their new remote-work freedom by taking the opportunity to travel, logging in for their workday from public networks in coffee shops, hotels, and similar spaces—which dramatically increases vulnerability to cyberattacks or breaches. Businesses will have to determine if that risk is worth the reduced cost of moving operations from in-person to remote.
The Cost of COVID-19
Like we mentioned above, the costs of operating a traditional in-person office are increasing as we reevaluate how to keep our companies and employees physically and technologically safe. Many companies are opting to downsize or move out of their physical office space rather than furlough or lay off talent—which disqualifies them from forgiveness on PPP loans granted in response to the pandemic. This trend isn’t just happening locally—major national companies have shifted to partially remote or fully-remote operations, notably, Pinterest recently paid $89.5 million to terminate an office lease in San Francisco in anticipation of long-term cost savings and operational changes.
We continue to see a downward shift in demand for commercial due to the shift to remote work and out of commercial properties, as well as the increased financial risk to investors, appraisers, lenders, and others involved in the commercial real estate market. In large part, this is due to lenders and financial institutions being less willing to take on risk—when buyers can’t secure financing, properties sit on the market for longer, and values decrease.
Our brokerage has its roots in appraisal—our founder, John Barkett, holds an MAI designation from the Appraisal Institute and a Master’s Degree in Real Estate Valuation and Analysis from New York University (NYU). Several of our commercial agents are also licensed appraisers. This analytic insight gives us an edge when looking at properties: we’re able to see long-term value, make intelligent recommendations, and act in the financial best interests of our clients. That said, we’re in an extremely unique time for commercial real estate, and most of our recommendations are currently erring on the side of caution.
The rollout of the vaccine will likely affect the timeline of safety precautions and as of right now the timeframe for the completion of vaccinations is unclear. It is best to have honest communication between brokers and tenants about costs in order to make sound financial decisions. Whether it’s the need to roll out new plans for physical office space or transition safely to remote working, both parties should know what they’re up against. By doing so, landlords and brokers can work to accommodate tenants to overcome these new obstacles.
Remaining Connected
It is no secret that decreased human interaction can negatively affect our productivity and happiness. Therefore, in what looks to be a future with much more remote work, remaining connected—not just digitally, is more important than ever. The practice of working on individual projects in a group setting, such as an office, is becoming a thing of the past. Therefore, when coworkers do find themselves working in the same space it is likely to be fewer and further between. That being said, physical coworking spaces can benefit from being purposeful in their design to foster connection and interaction. As a result, your company might end up with not only happier employees but more productive ones as well.
