There are always boom-bust cycles for commercial real estate, but the black swan event that was thrown at the industry in 2020 has led to some severe hand-wringing. In October, it was reported that the non-residential construction building was flat and didn’t look that there was a promising future ahead.
This downward trend had some significant effects on the industry. There were public health concerns, tightening local and state budgets, and a lack of additional stimulus to carry over and ease the economic uncertainty.
That all changed in early December.
Thanks to the pandemic vaccine(s) that are just rolling out, there is renewed optimism that by mid-2021, economic activity should be back at almost normal levels. The optimism is well-founded as a vaccine will alleviate the pandemic’s damage on people, societies, and industries worldwide.
The hardest-hit area in commercial real estate is those that are based on the proximity and density of people interacting.
Think retail, gyms, hotels, and healthcare locations. Meanwhile, storage unit facilities, data centers, and industrial facilities where human density is less an issue can operate more-or-less as standard operations.
Help Is On The Way Can Commercial Real Estate Adapt
With the hope that the vaccine will allow societies to turn the corner on the pandemic, it’s crucial to be strategic in planning for the economic boom that will follow. One area that the industry is prepared to pivot is a change in the traditional valuation of commercial real estate (CRE).
In traditional valuation models of CRE, cost, or sale per square foot is a significant metric. Still, even with a vaccine, in-person activities will be limited, and businesses need to pivot to adjust. The new model for determining valuation will disassociate with price per square foot and focus on the real estate’s experiential value in question.
The dropoff of Real Estate Investment Trusts, or REITs, was precipitous in early-to-mid 2020 and showed some recovery during the 2nd quarter until stalling out during the 3rd quarter of the year. This dropoff hurt traditional commercial real estate leasing and had a significant impact on new building construction.
Another negative trend affecting commercial real estate values is brick-and-mortar retail’s decentralization by online shopping options and delivery methods.
This trend has caused many landlords to reexamine their CRE holdings and pivot to a more flexible building usage model. For example, landlords are converting traditional retail space into more fluid dual-use spaces and making opportunities for shared-work space and wellness space to be adjacent to one another.
Adapt Or Perish As An Industry
What does a business do when it needs a significant pivot?
Find creative solutions and options to convert the traditional CRE space into something more flexible and modular for renters. When transforming from conventional CRE space into something more adaptive, several factors need to be considered.
There may be storage needs for pre-existing clientele or new clients before the completion of the remodel. In that case, keeping costs low is an obvious given, so a consideration toward renting a storage container or two versus buying one is a good starting point.
Whatever the remodel and repositioning taken by those in commercial real estate, the reality is that change is in short-order. But consider renting equipment, finding contractors to bid against each other, and be more adaptive in your approach.
Another good option is to secure the rental lease agreement and incorporate their specific needs into your remodel and have an agreement to share in some of the smaller costs associated with remodeling your space.
The Pivot From Traditional Models
The objective that any commercial real estate business or investor needs should place a priority on pivoting your business and investment model to something flexible and adaptive to the new environment we are experiencing.
It will be a while until things open up entirely, and life returns to normal. As there has been a premium placed on virtual learning, shopping, and more, traditional CRE businesses will need to adapt.
With the recent shift to virtual shopping experiences and the current necessity of remote learning and work, there’s a crucial paradigm shift that needs to occur in commercial real estate.
The pandemic only accelerated what was becoming a glaring trend impacting the traditional model of real estate capitalization. Those investors and companies that are versatile and flexible will be the ones positioned for success.