When economic events negatively affect the economy, the impact on commercial real estate (CRE) asset prices is expected. The industry recovery rates vary and typically lag the economy as a whole by half a year. However, 2020 is not a normal year and the commercial real estate outlook is uncertain both in terms of recovery length and what the future will look like.
One area typically considered in looking to the future is the state of the CRE industry prior to the economic event. For example, during the 2008-2009 recession, the industry was showing signs of weakness. Before COVID-19, the industry looked healthy. Liquidity was good, capital was available, and balance sheets were favorable. In fact, the Deloitte 2020 CRE outlook stated that 75% of those surveyed expected capital to be more available in 2020. That will certainly not be the case now.
Since the pandemic was declared and stay at home orders were issued, financial markets declined sharply, before showing signs of recovering, and the CRE sector was also affected in real time. With offices, retail, and restaurants closed, the pandemic created a never before seen challenge for the CRE industry. And with the sector valued in excess of $12 trillion, the outlook for recovery is an important trend to watch.
Regardless of how long the CRE recovery takes, the future is going to look different from anything we’ve seen before. There will be an inevitable move back into offices, but to what degree? In many sectors, companies are realizing that productivity has increased with remote working arrangements and may not have the need for either as many offices or as large offices. How will social distancing requirements affect open office layouts, a trend that has been widely adopted over the past two decades? And how will retail and lodging be affected by consumer concerns and new habits or ongoing restrictions on business travel?
According to McKinsey, CRE leaders are looking at the following imperatives:
- Earning the respect, trust, and loyalty of customers and employees
- Centralizing cash management
- Making tailored, informed decisions—particularly in commercial lease concessions
- Taking the digital leap
- Acquiring operating companies, not just single assets
- Rethinking the future of real estate, now
And Deloitte echoes these imperatives in their three phased approach to respond, recover, and thrive. Their recommendations include:
- Prepare for reentry to physical spaces
- Promote employee well-being and remote working
- Accelerate technology usage to make more informed decisions, drive efficiency, and improve tenant experience
- Increase focus on cybersecurity and data privacy
- Adapt to longer-term shifts in tenant preferences
- Reassess asset portfolio for longer-term risk mitigation
- Manage capital and liquidity
- Develop business continuity and disaster recovery plans
There is no doubt the industry will recover, but there will be challenges in the short-term to address. New tenant preferences, portfolio mix, regulatory changes, and technology adoption are just a few of the aspects that will look different moving forward. The companies that understand and adapt quickly will thrive in the long-term. Innovation is always driven by necessity.
If you have questions about the future of commercial real estate or work in the industry and need to address leadership vacancies, let us know how we can help.