How Will COVID-19 Change Commercial Real Estate?



July 17, 2020

For Sale sign with blue housing background.
For Sale sign with blue housing background.

As we reported a couple of weeks ago, U.S. commercial real estate is in the doldrums. To be more empirical, the industry, which was valued at $12 trillion pre-pandemic, is down 10.2% year-to-date, compared with the broader S&P 500, which is a mere 1.0%.

While this immediate decline is apparent, the pandemic doesn’t spell the end of CRE. Instead, the sector must adapt to a new normal, and it might be quite a while before it’s as profitable as it once was. But ultimately, these changes will be for the better.


  • Across all CRE classes, more space per occupant must be factored in
  • Office towers will still be desirable in city centers, but outlying office parks might need to be repurposed
  • Business travel will likely face secular decline, but leisure travel will eventually return
  • High-end apartments are oversupplied, but there’s a shortage of workforce housing

What’s changing

In the short term, it’s evident that CRE companies are hemorrhaging tenants. Small businesses are going belly-up at an unprecedented rate. Those that might still survive are partly doing so by renegotiating their leases. A square foot of floor space in a shiny, new office tower isn’t worth what it was in February. Many in CRE believe that Washington’s largesse has overlooked their sector as it pumped trillions of dollars into other corners of the economy. Still, there is some legislation kicking around that might fill this gap.

Fundamentally, the big difference in the new world is that physical distancing will remain with us for some time. As a result, those use cases that cater to packing in crowds are being challenged far more than others.

“Assets that have greater human density seem to have been the hardest hit: healthcare facilities, regional malls, lodging, and student housing have sold off considerably,” according to a McKinsey report. “By contrast, self-storage facilities, industrial facilities, and data centers have faced less-significant declines. … It’s no surprise that—when shoppers avoid crowds, universities send students home, and retailers, restaurants, and hotels close their doors—owning and operating those properties is less valuable. As such, liquidity and balance-sheet resilience have become paramount.”


One of the first casualties of the pandemic was the open-plan office layout. It was never a good idea. Since at least 2009, one study concluded that open-plan offices caused “high levels of stress, conflict, high blood pressure, and high staff turnover. … [T]he high level of noise causes employees to lose concentration, leading to low productivity; there are privacy issues because everyone can see what you are doing on the computer or hear what you are saying on the phone. There is a feeling of insecurity.”

It dies unmourned. We all found out what we suspected: “I can get just as much done at home.” Many of us might need to go into the office once a week, once a month, or never.

New office spaces will need to address the increased number of individuals working remotely, but this will be partially offset by the more significant personal space required by each individual whose presence is still needed. This is likely exacerbated by building codes changing to ensure lower density to prevent future pandemics. So expect a glut of office space as leases get renewed; the new contracts will be for reduced floor space at significantly reduced cost per square foot.

Even so, the location of the office building could determine whether or not it will retain tenants “When All This Is Over.”

One University of North Carolina professor says it’s unlikely that increased technology adoption will affect prime office space in core downtown areas.


You might be surprised to learn that hotels are not as beaten down as expected.

From the March 18 market nadir, Las Vegas Sands (LVS: $49.92) is up 21.4%, and InterContinental Hotels (IHG: $49.95) is an impressive 39.0%. These hotels are examples of the luxury and the traditional markets, respectively, and compare well with the broader S&P 500, up 24.8% in that timeframe. The better-known Marriott (MAR: $93.01) and Hilton (HLT: $79.73) brands are both up by the mid-teens.

And yet, habits are changing. Now that we know that grocery store stock clerks are essential workers and airline pilots are not, business travel could be in for a long slog. Now that everyone has video conferencing apps – more precisely, they’re using the apps they’ve had for years – we’re finding out how efficient and cost-effective these remote meetings can be. You don’t hear, “But there’s no substitute for sitting down face-to-face” very much anymore.

Leisure travel is also on hold, but it won’t be forever. There’s no sense going to Paris if the Louvre and the Follies Bergere are closed. But once they reopen and travelers feel safe getting on planes – and national governments feel safe allowing us across their borders – then hotels could surge again.

Retail and industrial

Anyone who was still resisting online shopping gave up the game over the past few months. We’ve discovered that we can buy a new pair of shoes that fit by using PayPal and delivering it.

But let’s be clear: Brick-and-mortar retail was dying anyway. When 9,500 stores closed in 2019, many pearls were clutched. This year, more than 5,000 have already shuttered for good, according to Coresight Research, which could hit 25,000 when it’s all over. WeWork, Staples, Subway, and Mattress Firm have already stopped paying rent.

So don’t expect shopping malls or free-standing retail space to come back anytime soon. But one industry’s loss is another’s gain. Industrial warehouses and distribution centers have proved their worth of late, demonstrating that they are far more essential than the retail spaces they once shipped to.

And we should also give the nod to a new class of industrial space. “Cloud kitchens” have been a thing since 2019, and maybe a little longer. They are industrial cooking facilities that delivery services can back-integrate into, virtually eliminating the need for a restaurant. Today, these cloud kitchens are emerging as one new purpose for CRE.


As of the 13th of this month, only 87.6% of apartment lessees paid any portion of the rent due on July 1. According to the National Multifamily Housing Council, that’s a 2.4 percentage point decrease from the previous month.

Still, people have to live somewhere.

“Multifamily will hold its own as the need for shelter remains inelastic much the same as the need for food, but we may see decreases in rents initially as renters struggle to make payments,” according to CRE management consultant Maria Sicola.

The situation is direr than most people realized before the shutdown. While many were unaware that there had been a persistent housing shortage in the U.S., a Harvard University study clearly explains how bad the situation is. Nationwide, the vacancy rate was 4.4% in 2018, the lowest generation.

“To meet growing demand, America needs to build at least 4.6 million new apartment homes at all price points by 2030,” the National Apartment Association announced in 2017. “In addition, as many as 11.7 million older apartments could need renovation during the same period.”

Pre-coronavirus, builders were putting up rental properties as fast as possible and still couldn’t keep up with demand.

While Class A properties will be harder to rent, there’s still genuine demand for Class B workforce housing.


Real estate investment trusts were invented in 1960 to allow retail investors to participate in mortgage lenders operating in various locations. While geographic diversity has remained a crucial part of REITs’ value proposition, today’s focus is far removed from the Eisenhower-era dream of white picket fences. Instead, it is keenly centered on the commercial market.

HOWEVER, within CRE, they tend to pick a lane and stay in it. While REITs specialize in offices, REITs specialize in hotels, and REITs specialize in apartment buildings, they get more specialized. According to Deloitte, the big winners specializing in data centers and cell towers over the past year, but since the study concluded in the early days of the pandemic, the story has pressed on. Healthcare REITs – which invest primarily in senior housing and hospitals, medical offices, and specialized care centers – have been on a tear. Since the March 18 market bottom, healthcare REIT Ventas (VTR: $35.84) has more than doubled.

Still, self-storage REITs are treading water, as are retail REITs. Meanwhile, office REITs have bifurcated; Alexandria Real Estate Equities (ARE: $163.77) and Vornado Realty Trust (VNO: $38.09) are up more than 20% from the bottom, but others have continued to slide. Finally, with the unaccountable exception of Aimco (AIV, $38.17), which has surged 22.1%, residential REITs have probably suffered the most since the March selloff, generally down about 10%.

REITs will tend to track the performance of their underlying assets going forward.

The good news

Deloitte came up with an interesting question: How does CRE do before, during, and after a black swan event? Practice lead Jim Berry singled out the Asian flu of the 1950s, the 9/11 attacks in 2001, the SARS outbreak a year later, and the swine flu epidemic that overlapped the Great Recession.

Berry’s team found out that, whatever immediate contraction occurs during the crisis, commercial rents and REIT prices generally trend upward 12 months later. That coincides with an increase in transactions as the industry consolidates.

It should also be noted that, before the COVID-19 pandemic, CRE was much firmer fundamentally than it was in the days leading up to SARS or swine flu. The implication for the current market is that, yes, rent delinquencies have been up since March, but from near-historically-low levels. The market can take this hit.


William Freedman, MBA, writes about finance and technology. He serves on the board of governors of the New York Financial Writers’ Association.

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