How Will a Post-Pandemic CRE Recovery Unfold?

people sitting in an office

The past pandemic year was one of the toughest times for commercial real estate, but the industry has already seen a gradual recovery in the first two quarters of 2021.

The key word here is “gradual.” Some realtors are aware that CRE will take longer than expected to recover from the pandemic, though businesses are adapting to new structures and revenue streams to prepare for a possible future crisis.

Tech trends are flooding the CRE market, from robotic process automation to data-driven decision making, while e-commerce will continue to grow.

Clearly, offices will never be the same. Neither will retail. Among the latest CRE trends, a recent CBRE research report found that health and safety is a top CRE mission going forward, as well as other trends that track the evolution of the workforce.

Spencer Levy, Global Chief Client Officer and Senior Economic Advisor at CBRE, a global commercial real estate firm, said the recovery will come in three phases; today, tomorrow and the distant future.

Right now the focus is on industrial, office, multifamily, retail and hospitality, with the first three surprisingly doing better than expected.

They’re collecting 90% of rent in 2021 (though retail is still under-performing roughly 20 to 40%). Obviously, travel and tourism are lagging as well. The distant future, Levy said, will slowly look like pre-pandemic times.

He remains positive, however.

“I’m optimistic because of the tremendous liquidity and ‘pent up demand’ in the consumer to spend,” Levy said.

It’s true. Some are already reporting on the post-pandemic spending spree storming the country.

“The next 18 months will see rapid improvement in all asset types except for those dependent on international travel, which will likely be constrained until the second quarter of 2022,” he predicted.

Office space has seen a huge hit, with some office spaces being turned into affordable housing, while others have already begun to see a bounce back.

“There is no asset class that has been more highly scrutinized during the pandemic than office. I also think there is no asset class that has been more misinterpreted during the pandemic and by extension high density cities where the majority of offices sit,” Levy explained.

“The bottom line is that we will see some changes to office post-pandemic, but not nearly as much as people think, in terms of office demand.”

“You will also see greater focus on open air amenities, touchless technologies, de-densification and flex space, which will keep cap ex pouring into existing stock and demand for new stock.”

Levy also cited the growth of new, enhanced wellness features at the office. It’s more than just a yoga room or meditation corner. It’ll come in the form of ‘de-densification,’ meaning more space, really, or more specifically, square footage per employee (basically, lower occupancy equals more personal space).

“There will be touchless technologies, open air amenities, flex workspace,” Levy said.

He’s not alone. Many are catching onto the de-densification trend, less people in more space. It’s the future of the office. According to a recent survey from Colliers, 30% of workers will return to the office before October. Many companies are weary of returning to the office without de-densifying their office spaces. Offices will be built with better ventilation, touchless tech and cleaning facilities to adapt to social distancing.

There will also be improved HVAC (heating, ventilation and air conditioning), too. That investment includes “hydronic” HVAC, according to Levy, which pumps hot and cold water into the floors and walls, “rather than forced air through the vents.”

It’s going to be more than just big cities bouncing back. As commercial real estate in larger cities recovers, there will be more rivalry from secondary cities with smaller populations.

“While big cities like San Francisco and New York will make a big comeback, they will face increased competition from smaller, faster growth cities like Nashville, Austin, Denver, Miami and Raleigh,” Levy said.

He added: “Talent is and always will be the name of the game. The ability to attract and retain top tier talent is the race being run in
CRE through locations.” Building design, infrastructure and other factors will come into play, as well.

“The future looks more like the past than we think as the ‘Agglomeration Effect’ of major markets—the confluence of talent, capital, infrastructure, the arts and sheer mass—has great value,” said Levy. “It will be impossible to replicate in scale in the short term in rising smaller cities.”

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