The commercial real estate market has suffered severe blows from the impacts of the COVID-19 pandemic. Many businesses shut down; others could only stay afloat without paying rent, while millions of Americans transitioned to home offices, leaving their physical workplaces vacant. All these were among the trends that the commercial real estate market experienced in 2020.
However, industry experts argue that if offices, hotels, and other commercial properties pull through, their luck should change for the better by the end of 2021. Hotels, offices, and retail storefronts are expected to record a massive economic recovery in 2021, as investors place their faith in the rolling out of a COVID-19 vaccine in 2021.
According to experts, many commercial properties are expected to remain idle during the first half of 2021 before the commercial real estate market begins to stabilize in the second half of 2021. Meanwhile, the value of warehouses and distribution centers is expected to incline.
“As monumental as 2020 has been, 2021 could be even more influential, as the critical decisions and investment leaders make now could bear fruit over the next 12 months,” said Kathy Feucht, global real estate leader at Deloitte, a London-based professional services network.
According to Deloitte, commercial real estate investors plan to cut costs by 25% on average in 2021 to weather the tail end of the COVID-19 pandemic. However, cutting costs might be short-sighted. This is because keeping up with the growing demand for ventilation, health-related amenities, and digital proptech could increase operating costs by $19.40 per square foot in 2021, according to Deloitte.
The growth of ‘dark stores.’
Reports have revealed that more retailers went bankrupt during the pandemic-ravaged 2020 than in the Great Recession, especially department stores and apparel retailers. As the online shopping trend continues and brick-and-mortar retailers tap into their cash reserves, more retailer shops are expected to remain idle, and landlords are expected to default on their loans in the first half of 2021.
Moreover, forecasts show that there will be 20% less retail real estate by 2025, according to the CBRE Group, a Los Angeles-based commercial real estate services, and investment firm. However, once the COVID-219 vaccine is rolled out in the US, shoppers are expected to transition to experience brick-and-mortar stores.
“As we look to 2021 and beyond the pandemic, we believe people will desperately want to connect and gather and experiential retail will once again thrive,” said Terry Montesi, CEO of Texas-based Trademark Property Company.
Moreover, malls and urban retail spaces based in places New York City and San Francisco are expected to see their vacant storefronts replaced by health care and wellness centers, grocery stores, and other alternative stores.
“We are seeing a demand for ‘dark stores,’ where retail sales aren’t fueled by pedestrian traffic, but by curbside pick-up and same-day delivery,” said Claudio Mekler, CEO of Miami Manager, a private investment firm based in South Florida that owns community shopping centers in Miami-Dade, Broward, and Palm Beach Counties.
Most office spaces remained idle in 2020. Investors expect workers to gradually return to the offices after the pandemic slows down. In contrast, companies have shifted to work-from-home policies; thus, office demand could permanently drop by 15%, according to CBRE.
However, the office space market is expected to hit rock bottom and begin stabilizing in 2021. According to CBRE, 85.7% of companies plan to return to the offices halfway through 2021 as the economy is set to continue recovering.
It’s not yet over for hospitality.
Hotels are still set for another rough ride in 2021. While hospitality firms are expected to recover over 50% of revenue in 2021, the general hospitality industry is not expected to recover until later in 2023; and the most high-end hotels which serve businesses and group travel are set to take even longer to recover, until 2024 or 2025, according to CBRE.
Warehouses to continue thriving.
Warehouses were the unpredicted champions of the 2020 commercial real estate. However, their thriving is set to continue in 2021 as logistics firms try to accommodate the expanding e-commerce orders. Experts predict 250 million square feet of additional demand for warehouse space in 2021, from the 211 million square feet annually over the past five years, according to CBRE.
With the insights above, you now have a picture of where to invest in the commercial real estate market in 2021.
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Disclaimer: The views and opinions of Eric Lawrence Frazier are his own and do not necessarily represent First Bank or any organization affiliated with Eric Lawrence Frazier, or the Power Is Now Media Inc. First Bank is an Equal Credit Opportunity Lender. Eric Lawrence Frazier, MBA, is also a Vice President and Mortgage Advisor with First Bank. NMLS#461807 and a California Licensed Real Estate Broker DRE# 01143482. Email: Eric.firstname.lastname@example.org. Ph: 714- 475-8629.
Eric Lawrence Frazier MBA
President and CEO
The Power Is Now Media Inc.