Real Estate Adapts to the New COVID Normal

Like most other industries, the real estate business was turned upside-down in March when the COVID-19 outbreak got real. Now that five months have passed and life with COVID-19 appears to be the new normal, some real estate trends are starting to shake out.

On the commercial side, the balance of power has shifted in favor of buyers and tenants, and against owners and lenders. Buyers and tenants both are being very careful to assess their actual space needs going forward. How many employees truly need to work onsite? Will the shift to work at home become permanent? How well does the space accommodate social distancing, and what amenities does the property offer to ensure a sanitary environment? What will my customer traffic look like going forward? Without answers to these questions, buyers and tenants are reluctant to pull the trigger on any new deals. This cautiousness is evident in the more than 30% drop in buyer traffic for commercial brokers, as of late June.

Landlords and sellers, on the other hand, must adapt their strategy to successfully market their properties in an environment where these factors have suddenly taken on new importance. Whether an available property will meet tenants’ and buyers’ new priorities will of course differ from property to property, but the new normal has required landowners and brokers to re-evaluate the strengths and weaknesses of their properties from a different perspective. One bright spot for sellers, however, is that unlike after the Great Recession, there is still a lot of real estate capital on the sidelines waiting for the right deal.

Real estate lenders also find themselves at a disadvantage. Mortgage rates are historically low, but risks and unknowns are high given the challenges borrowers face to maintain cash flow and the uncertain path forward through the pandemic. Taking on additional risk for less return is generally not an attractive lending scenario. According to some observers, high cost lenders who focus on distressed debt and who are less adverse to acquiring properties after default are best positioned to capitalize on the slowdown in the lending market.

On the residential side, impacts are not nearly as profound. Low mortgage rates are keeping the purchase and refinance markets hopping. The sharp increase in working from home has untethered many families from having to live close to work, causing an uptick in interest in residential properties far from urban centers. Residential brokers have adapted to the new normal too, quickly adopting COVID-specific advisories and disclosures for buyers of residential property.

While uncertainty remains the word of the day when it comes to predicting the near-term future of both commercial and residential real estate, some long-term trends are coming into focus. The trend towards remote working and the desire for workplaces designed to reduce the risk of infection are likely to continue even after the worst of the pandemic is in the rear-view mirror. Savvy participants in the real estate industry will be well-served to refine their strategy with these trends in mind.