For well over a year, people were forced to adjust their lives on every level because of the COVID-19 pandemic. The changes were so swift and all-encompassing that it was all but guaranteed to transform the commercial real estate industry – an industry that was already experiencing transitions driven by proptech and the expansion of corporate real estate data.
As a corporate real estate professional, it may seem like there’s a lot of uncertainty. The supply/demand balance is nowhere near what it was before the pandemic. How people work and shop has shifted even further towards virtual spaces rather than physical spaces. It’s still somewhat unclear how many businesses will pull through the pandemic and which ones will grow as a result of all the changes.
It’s understandable if the confidence of CRE portfolio managers has been shaken a bit. But there’s also a sense of urgency to find the next big opportunity in corporate real estate. There’s still an understanding that there are good investments to be made – portfolio managers just have to identify them. And fortunately, one of the pandemic effects should make that colossal task much easier on portfolio managers and asset managers. In this post, we’re exploring what the major drivers of change will be in CRE as a result of COVID-19 and what commercial real estate managers can do to navigate the changing landscape.
The pandemic brought about a complete 180 in many sectors of the commercial real estate industry. Seemingly overnight, activity came to a grinding halt. Then slowly, the wheels began to turn again, but the industry changed direction. So far, a few primary drivers of change due to COVID-19 have emerged.
There’s one certainty for CRE after the pandemic – corporate real estate will never be the same. We were already on the trajectory to make more jobs remote, but COVID-19 put things into warp speed. Even the most reluctant companies had to figure out a way to work virtually and close their physical doors. Many companies found the new way of working was more productive than they thought it would be. And it’s not surprising to find that many employees want to continue having the option to work remotely, at least part of the workweek. As a result, the biggest post-pandemic change by far is the fact that more people will continue to work remotely long after the pandemic has passed. This means that office space most likely won’t be in high demand, but that is just the start of the domino effect. Many more nuanced and subtle changes will occur and further impact the commercial real estate market.
There’s an abundance of unused office space all around. It’s a trend found in any corporate real estate market across the country, both inside and outside of the central business districts. It’s now up to the commercial property owners to reevaluate how the spaces are used and how to make reconfigurations that support the way business is going to be conducted moving forward.
There are two trends for how excess office space is being repurposed:
Fewer people needing cubicles and offices means that there’s more room for flex spaces. Tenants want spaces that are reconfigurable and can adjust to serve various purposes. Spaces that can expand and be scaled back to accommodate a different number of in-office workers is something that will attract many more companies than it would have before the pandemic.
Tools like RefineRE FLEX will also be in higher demand as owners look for commercial real estate intelligence directed at evaluating the viability of flex spaces.
One thing that workplace experts have already noted is the importance of creating a “community workplace” as more employees work remotely but occasionally come into the office. The idea is to have spaces that are communal and allow for intentional social interaction. It’s where in-office and remote workers blend together. Community spaces also allow for equal access to company tools and resources, which is another growing concern in blended workplaces.
The pandemic accelerated another trend that had been simmering in the CRE industry. Online ordering was at an all-time high during the pandemic. In 2020, online sales soared 44% higher than the year before. Another indicator of the growth was the surge of delivery services needed to bring everything to people’s doorsteps. It’s very clear now that retailers need less storefront retail space and a lot more warehouse space. This is both a long-term trend as more and more items are purchased online rather than in-store, and it’s short-term as more retailers stock up to avoid COVID shortages.
Investors and portfolio managers are smart to consider a new type of asset if they’ve never invested in industrial warehousing and storage facilities. And if a commercial center is a part of the portfolio, it’s wise to consider how the commercial property can be utilized for more than shopping to generate foot traffic.
More portfolio managers and corporate occupiers are beginning to see there will be a new normal in commercial real estate once the pandemic is past us. There will be market corrections that get us back closer to where we were pre-COVID, but many segments of CRE have permanently shifted. And there are some key players that are interested in leveraging the opportunity to transform the industry.
In particular, Proptech companies and commercial tenants are helping to reimagine the CRE industry. Right now, it’s a buyer’s market in many commercial real estate markets, and tenants need different types of workspaces. They need different amenities and flexibility. These needs will play a key role in how commercial real estate properties are developed and repurposed moving forward. One positive sign of growth in the CRE industry is investment in Proptech. Commercial real estate sales may have slowed during the pandemic, but the vast majority of Proptech investors believe the adoption of CRE tech has been accelerated by the pandemic. A survey from MetaProp early this year also showed that sentiment has only improved since the beginning of the pandemic. Experts like Deloitte Consulting’s U.S. Real Estate Leader John D’Angelo have also agreed with these investors in recent interviews.
Today, the reported confidence levels of investors and Proptech startups are at the highest levels ever recorded. Some are predicting there will be a significant increase in acquisitions in the coming months. Portfolio managers need to keep a sharp eye on the Proptech industry because 6 out of 10 investors surveyed plan to increase their investments in Proptech. Given how much the industry is changing, the surge of interest in Proptech makes sense. Technology can help segments of the CRE industry make necessary adjustments and find new opportunities as old business models become obsolete or less profitable.
Corporate occupiers, asset managers, and CRE portfolio managers need tools that will give them clear insight into what’s happening now and how things are trending. Post-COVID commercial real estate data is needed to provide direction during the uncertain transition period. New technology is needed to accommodate virtual teams. Technology that optimizes the repurposing and efficiency of physical spaces will likely be in very high demand. Another key way Proptech is set to help the CRE industry is revealing a portfolio or asset’s weaknesses and challenges more clearly. Commercial real estate data science and intelligence will go deeper, and advances like machine learning will make predictive analytics more accurate.
The biggest question for a commercial real estate property owner is what to do with an abundance of unused office space. Incorporating more flex space is one option, but some owners are getting very creative in how they repurpose spaces. Some owners are “upcycling” commercial spaces into something completely different – public space. Specifically, in older commercial zones that are underutilized, the idea is to create community spaces that generate foot traffic and interest. How these spaces are repurposed is going to have dramatic effects on the CRE industry in terms of recovery and how things operate in the future. The biggest takeaway is that corporate real estate is still a critical part of business operations that isn’t going to disappear. It’s where acquiring, onboarding, and team building happen. A commercial real estate company’s office is also one of the biggest drivers in the company culture, values, and image. And as already mentioned, the office can serve as a communal space where virtual workers can come connect. There will likely be lucrative opportunities for portfolio managers and asset managers, they just have to recognize how post-pandemic requirements have shifted to stay one step ahead of the transition.