The Economy of Commercial Real Estate

OPEN BACK UP THE ECONOMY? V-shaped recovery? Back to business as usual? It is just not going to happen. So, what can we expect for the economy of commercial real estate?

We might expect continuing outbreaks and rolling curves of infection across the nation for at least the next few months and more probably until a vaccine is widely available. That could be at least a year.

When the situation improves in major cities, people will not be eagerly jumping back onto mass transit, cramming into sports arenas or theaters, or jamming into bars and restaurants.

So far, the federal government has been ineffective about ramping up testing and providing sensible guidelines, so big city mayors and most governors, who have ultimate control over local rules, will be careful about lifting social distancing until there is more testing available to track what is going on. Airplane travel will continue to be problematic. Do we envision packed jetliners and airline terminals as long as there is a substantial threat of infection?
Covid-19 CRE

The same dynamic of asymptomatic carriers spreading the virus will be in place until antibody tests are widespread and we have some understanding of immunity from previous infection. That is not happening immediately. Until then do you want to risk spreading infection to members of your family or getting it yourself?


For starters, hotel bookings will not rebound dramatically. Companies will not resume business travel except for essential trips. Conventions and seminars in hotel conference rooms?….Nope.

When it comes to vacations, many people can be expected to orient to staying near home and reconnecting with local friends and family. Disneyland, Knott’s Berry Farm, and all “tourist attractions” will have dramatically reduced attendance as well as the supporting businesses around them. If local businesses can’t sell their product or service, then no local sales taxes are collected by the various cities, cratering local governments.

On the retail front, the pandemic has only reinforced the efficacy of online commerce. The store closing wave, underway for years, has steepened and will crash on shopping center owners. Restaurants will struggle and probably face local regulations to limit diners and enforce space restrictions.

And movie theaters? It will be just a lot safer and easier to continue binge watching at home via Netflix, HBO, or Disney than going to a movie theater, whose screening rooms have never been known for cleanliness or hygiene. Why else are they always so dimly lit? No thanks.

Less driving means buying less gas, tires, automobile repair, car washes, and receiving less traffic citations.

Federal bailouts should allow many tenants to keep paying rent, if the check ever arrives. But the drain on state and local government coffers will likely result in major cost cutting to balance budgets—that translates into lost public sector jobs and private sector government contracts (more lost jobs), this will shrink office demand. Over time, companies will logically recalculate their space needs—the pandemic will prove to many who have not worked remotely that it is possible work effectively, especially with zoom-type technologies.

For th economy of commercial real estate industrial real estate will probably suffer the least, as warehouses still need to move product from manufacturer to end user. Since industrial buildings seem to have less employees per square foot than office buildings, social distancing is easier. Additionally, many users of industrial building have limited or no contact with the general public.

The pandemic also offers the opportunity to cut workforces permanently—companies will have the perfect excuse not to rehire certain furloughed employees. In addition, watch for capital-starved start-ups to go out of business. It all spells a dampening of demand and a regulator on rent levels.

But until a vaccine, city life will be compromised and the hit to local tax receipts will be severe, impacting city services and quality of life as well as necessitating raising taxes.

Suburban separation may look more attractive and remote working options could reinforce inclinations for not needing to be in the big city. Compromised cultural institutions and nightlife dim the bright lights for at least a while. And this all means lower urban property values. Not good for 24-hour markets, such as Las Vegas. Paycheck to paycheck renters may delay rents and local non-eviction rules will tie landlords’ hands.

Unemployment insurance and federal cash payouts should help maintain revenue flows in the short term. But all those service jobs are not immediately coming back and unemployment may drop from stratospheric levels, remaining uncomfortably high for a while. For the economy of commercial real estate, rent inflation is over and landlords will still be faced with property tax bills and other expenses, squeezing profits and investment returns. Some Owners are getting ahead of the curve lowering asking sales prices and lease rates rather than following a lowering market.

This does not look like a V-shaped recovery, does it? Stay tuned…

Contact Dan for any questions