COVID-19’s Effect on Commercial Real Estate

Commercial real estate (CRE) is typically one of the last sectors to be affected by economic downturns. However, during the COVID-19 outbreak, things have been everything but typical. Leading up to the pandemic in March, things in the CRE market were what most brokers in the field considered something never seen before. Cap rates were exceptionally low, price per square foot on sales and leases were high, demand was there, and the economy was getting stronger. That all took a turn when March came though.

 Almost overnight, mass shutdowns of businesses and workplaces started to take place. Countless workers have been laid off and quarantine became the new way of life. In the past, we have seen residential real estate take a hit and then commercial take a smaller hit, usually much further down the road. During this pandemic however, CRE was affected almost immediately as opposed to the typical lag due to many businesses shutting down.

 As of April 15th, The Data Center REITs index was up 34 percent year-over-year, while retail and hotel REIT indexes were down 48 percent and 53 percent, respectively. During normal recessions, investors and REITs tend to hold fairly strong as businesses take a hit but are still able to remain open. This is not the case during the COVID-19 pandemic. Many small businesses have been forced to shut down completely, while few are fortunate enough to have online sales platforms to maintain some business transactions.

Before the COVID-19 pandemic, retail was struggling, while industrial remained as strong as ever. Office was hurting but remained somewhere in the middle. Due to the COVID-19 outbreak, the retail market has taken an enormous hit, while the industrial market remains somewhat strong with a few hiccups here and there. Many fellow brokers that I have spoken with have stated that some of their industrial deals are being put on hold as owners and investors see how the coronavirus situation pans out. According to FEST Nareit US Retail Index”, retail is down 48% year-over-year as of Mid-April. New Jersey state restrictions have become more relaxed since then, and are more in favor of the retail, office and industrial markets.

Going forward, we need to be optimistic and focus on looking ahead. This pandemic will not last forever. as history has shown us. There are tens of millions of Americans currently on unemployment, but that number will fall more and more once the unemployment benefits go back to normal and small businesses like restaurants and bars start to open back up. The industrial market will remain strong, as COVID-19 has taught us that e-commerce remains vital, especially in a pandemic. As for retail, I believe it will bounce back as many people empathize with what mom-and-pop shops were experiencing. I trust that most Americans will support small businesses even more now, in direct response to the tough times that COVID-19 has brought onto our local shops. I also believe that you will see the need for medical office space increase drastically to prepare for the future, so we do not repeat our past issues of overloading our local hospitals.