The COVID-19 pandemic has taken a toll on every industry on the planet. Many have faced a severe blow, while some have thrived with unexpected vigor. And some industries have changed track and positioned themselves to make the best out of the disruptions.
So, how did the real estate market fare? The residential sector has shown steady growth, primarily fuelled by low mortgage rates. The commercial real estate market, on the other hand, has shown mixed reactions—many traditional segments have severely suffered while some have found new growth avenues with emerging opportunities.
Here are 5 important impacts of the pandemic on the commercial real estate market that could have far-reaching effects on its future trajectory.
1. The changing workplace will drive down demand for office real estate
COVID-19 led to several critical changes in the typical workplace. A large segment of the workforce adopted work from home practices—a transition that’s likely to continue into the future for many of them. As businesses grapple to recover from the dire financial consequences of the pandemic, remote working seems a smart move for many of them to bring down their expenses and run leaner operations.
This would inevitably lead to declining demand for office spaces, evidence of which we have already seen. According to a KPMG report, 69% of business leaders are now planning on cutting down their office spaces in the short-term. And the long-term impact of this is yet to be seen as businesses assess the financial and operational impact of managing a remote workforce.
2. Shifting shopper behavior is affecting retail real estate
The pandemic has also changed how people shop. Online sales activities have picked up fast as many shoppers abandoned their high street shopping carts. According to studies, 90% of customers now opt for home delivery over in-store shopping.
And retailers are experiencing this dramatic shift first-hand. Nike, for example, saw an 82% increase in its online businesses, while its high street stores remained shuttered.
This shift in shopper behavior will see retailers making long-term changes to their business models. While many will transition away from their on-ground stores, those who are slow to respond could see their businesses struggle and even shut down. In fact, nearly half of retailers are already failing to pay their rent. And retail real estate could continue to face trouble as this trend escalates.
3. Fragile entertainment, recreational, and leisure sectors impacting commercial real estate
While the consumption of digital entertainment such as movie streaming and gaming has increased with COVID-19, on-ground entertainment, recreational, and leisure activities have declined due to pandemic fears and travel restrictions. This means restaurants, hotels, and recreational real estate will continue to suffer in the short to medium term.
Of course, there is nothing preventing life from transitioning back to pre-COVID normalcy once the pandemic threat dissipates. But things will be different for sure — more people will be concerned about health and safety. There will be an increased focus on how they consume entertainment, take up recreational activities, and spend their leisure time. And all these will impact real estate demand in these sectors for years to come.
4. A new boom in warehousing and last-mile fulfillment centers
With the sudden surge in online shopping, more businesses have transitioned into digital stores, while established online retailers ramped up their operations to cater to the rising shopper needs.
All these activities have led to increased demand for warehousing space, particularly when it comes to last-mile fulfillment. More retailers are now looking to locate their fulfillment and distribution centers closer to the customers in order to move their inventories faster and keep their delivery promises. This has led to an influx of demand for warehouses in areas with a high population density and higher disposable income.
Studies indicate that 43% of online shoppers are extremely or very likely to continue shopping online, even after the pandemic. So, this trend in real estate will likely continue into the future. According to Prologis Inc., demand for warehousing space in the US could surge as much as 400 million square feet in the next 2–3 years.
And in response to this sudden opportunity, commercial real estate is also converting into warehouse spaces now. Many of them are located in densely populated areas, but facing low demand due to struggling retail businesses. Therefore, this transition to industrial warehouse properties would serve as an apt move for many of them.
5. The essential services driving commercial real estate growth
COVID-19 saw several sectors coming into prominence and commanding increased investments. For example, healthcare came into focus as the pandemic led to strained resources in the sector. Research laboratories and pharmaceutical manufacturing drew similar attention.
Tech and big data continued to grow in importance with increased adoption in all aspects of life — from remote working to online shopping and digital entertainment. The data center market in China, for example, is expected to reach $36.18 billion by 2025, a staggering 178% growth from 2019.
And increased activity in sectors such as these is driving up property demand. It’s creating new opportunities for commercial real estate to adapt and serve fast-growing industry needs.
The new world order
COVID-19 has transformed how people work, shop, entertain, socialize, and spend their leisure time. All these have dramatically affected how organizations operate and respond to a new way of life. And its ripple effect has changed the role of commercial real estate as well, with many of its sectors facing adverse reactions.
But despite the downturns in many areas, new opportunities have emerged to mitigate risk and create new avenues of growth. And these will shape commercial real estate in the years to come and determine its growth trajectory in the new post-pandemic world order.
