Steven LarsonIn Part One of this blog post, I discussed an article recently published by CRE – The Counselors of Real Estate entitled, “The Coronavirus, the End of the Cycle, and U.S. Commercial Property Markets: Early Thoughts.” In this Part Two, I will continue my discussion of the long-term issues facing the real estate sector as a result of the coronavirus.

Bricks-and-mortar retail has spent the past 10 years experiencing a seismic shift toward e-commerce, eliminating mainstay stores like Sears and Toys ‘R Us and forcing retailers to adapt to changing consumer shopping habits. Social distancing and stay-at-home orders have greatly increased our reliance on e-commerce. Consumers who have shunned e-commerce in the past have been forced to adapt and may continue to utilize its convenience once the pandemic passes (hello, mom and dad). It is, therefore, reasonable to assume that there will continue to be an increase in empty storefronts and closures of malls that were already struggling to keep tenants, particularly with vacancies left by restaurants that could not weather the storm. This e-commerce shift, however, will continue to benefit the industrial and logistics market, particularly last-mile logistics.

The biggest potential long-term shift may be in the office leasing market, as companies are forced to allow workers to work remotely. Companies are essentially test-running virtual workplaces for the next four to eight weeks, and some may decide to make that shift permanent for its employees and greatly reduce their physical footprint. There are a myriad of reasons to bring employees together in a workplace, but for jobs that can be performed remotely without much need for collaboration, employers may seek to minimize lease overhead. This shift would actually create a boon for those flex-space owners who are likely going to feel significant strain in the coming months.

For an interesting discussion on COVID-19’s impact on commercial real estate lending, please see this post by my colleague, Kristin Boose.

Ultimately, both the short-term and long-term effects on the real estate sector will depend on a number of factors that are nearly impossible to predict right now. Those factors include: the duration of this pandemic; whether we face a second pandemic in the fall and winter; what actions the federal and state governments take to ease the short-term crush on families and small businesses; and whether the financial markets can quickly get back to full speed. To quote the author of the article referenced above, “This is going to be ugly. And we won’t know for a while just how ugly or for how long.” Be mindful, however, of the wise words of Marcus Aurelius, “Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present.”