Ten months into the economic crisis caused by the coronavirus, and clearly the effects are being felt all across the country, including in the commercial real estate business. The entire country has changed long-established habits of shopping in strip malls, going to work, and buying groceries in person. Underlying these lifestyle changes are the buildings themselves, in which people live, work, and shop (or used to). After nearly a year of coronavirus lifestyle changes, the trickle-down effect is taking its toll on commercial real estate.
Many companies are closing, especially small and independently owned businesses, and the ripples of these losses are making waves. Commercial real estate forms the tax base in many communities, so when that tax money dries up, many of the community services must operate on a shoestring. The problem is becoming more apparent.
“That period of ‘let’s just put a Band-Aid on it’ is more or less coming to a conclusion,” says Wendy Silverstein, a former executive with Vornado Realty Trust and WeWork who recently started a restructuring and advisory firm. “There’s a lot of collateral damage that’s going to be hanging around for a while.”
And 2021 is going to tell the tale of how extensive that damage is. Bloomberg estimates that “roughly $430 billion in commercial and multifamily real estate debt matures in 2021,” and now both lenders and borrowers must make sense of what these buildings are currently worth.
Large cities like New York City are taking a big hit, with many businesses already on their way out. Even deals recently made are being re-thought in light of the long-term effects of the pandemic. Business Insider reports that “Uber is looking to dump a big chunk of a huge new NYC office it recently signed” and “AT&T is putting WarnerMedia’s huge NYC headquarters under review and could decide to cut hundreds of thousands of square feet of office space.” These business giants are changing the commercial real estate landscape in real time, all due to the coronavirus.
Even with companies that have not been forced to shutter their doors, the business models are changing. With fewer people going to work, companies are looking for lower-cost buildings in which to house their companies.
Bloomberg reports that “Goldman Sachs Group Inc., for instance, has scouted for offices in South Florida in a potential relocation of part of its asset-management business from Wall Street. Silicon Valley stalwarts Oracle Corp. and Hewlett Packard Enterprise Co. are moving their headquarters to Texas.” These companies are seeking real estate at more reasonable prices so they can continue to turn a profit.
Yahoo further explains that Amazon is talking with Simon Property group, the country’s biggest owner/operator of malls, in order to repurpose some former mall space for its distribution and fulfillment centers.
Companies are shifting their headquarters, looking for cheaper ways to do business, and continue to make a profit. But what will happen to these empty buildings?
The Bright Spots
Every cloud has a silver lining, and there are some business sectors who are still gobbling up commercial real estate, and companies for whom the pandemic has been a boon. With the advent of the vaccine, for instance, life science companies are clamoring for lab space so that more vaccines can be created and disseminated. According to Business Insider, “A Saudi-based PE firm just signed a $225 million deal for a life sciences campus in Philadelphia — a signal that investment interest from abroad is heating up.”
And since so many people have changed their lifestyles because of the contagious coronavirus, other types of businesses have found they suddenly need more space. With so many people working and playing at home, for instance, data storage and the consumption of streaming content is at an all-time high, and these companies need a place for their businesses to grow.
And clearly the ecommerce industry has gained much traction with many consumers shopping from home, afraid to go into stores and infect themselves with the virus. Yahoo reports that “Amazon the e-commerce giant continues to perform well amid the COVID-19 crisis, doubling its profits year-over-year to $5.2 billion in the second quarter despite the worst economic contraction ever experienced by the U.S.”
With the large number of commercial real estate bills coming due this year, many companies may soon take an even bigger hit. But on the flip side, businesses that are ready to expand should be able to cut some great deals in commercial real estate. The problem of all the empty buildings remains, but until the United States can vaccinate a larger amount of its citizens and life can return to normal, these buildings just might have to sit vacant.
I like to spend my time giving back with organizations that focus on mentoring aspiring entrepreneurs. I have supported after school programs that focus on entrepreneurial and global initiatives in local primary schools. I recently extended my mentoring to include students at Case Western Reserve University.