How will the COVID virus affect your commercial real estate space needs and occupancy moving forward?
By Andrew Sorensen, CCIM
“It is not given to human beings – happily for them, or otherwise life would be intolerable – to foresee or predict to any large extent the unfolding course of events” Winston Churchill
How will the COVID virus affect your commercial real estate space needs and occupancy moving forward? Right-size. Out-sized. Spaced Out.
We are going to see a change in our commercial space use and occupancy moving forward. Let’s tackle this sector by sector. I’ll touch on what I see happening at a national level, talk about how that affects us in the St. George area and other regions, and what trends we might see happen locally. One point that I want to make first that applies to all sectors…I believe we will see a movement away from urban back to suburban. This will impact all sectors and bring substantial growth to the St. George area. Crowded mass transit, high density crowding, and small apartments all have started to lose some appeal as a result of the COVID situation. This shift is going to have an impact across the board. Industrial and multifamily sectors are going to fare the best. Let’s talk shop.
I believe we are going to begin Industrial 2.0. We are going to see reinvention in our supply chain. There will be less “Just in Time” manufacturing/inventory and more “Just in Case” inventory. The China shutdown exposed an over-dependence that we have created outsourcing most of our manufacturing to China and other Asian countries. What we were thinking having critical pharma supplies come mainly from a single source/country? This virus is going to dramatically increase the trend of “on-shoring” of our manufacturing–especially critical components and supplies–bringing more of our manufacturing back to the states from China and other countries. We will see an increase of warehouse space demand in the country and locally as we move towards “Just in Case”. I believe we will also move away from the larger one million plus square foot distribution centers and more to 200-300k distribution centers as a way to better distribute the supply chain. The St. George area will benefit from this movement as a gateway regional warehouse and manufacturing location to other markets with lower cost real estate, a mostly non-unionized and cheaper work force, and lower operational costs. We will also see increased space demand from the flight to suburban movement as some companies will use this as the final straw to leave areas that have become overly restrictive from an environmental and policy perspective and less business environment friendly overall (California, I’m talking to you…)
Retail just can’t seem to catch a break. Seriously. First the Amazon effect and now this. We are going to see the retail e-evolution continue. It’s not apocalyptic. It’s just evolving. We will move from shop and take home, to more deliver and just in time delivery of groceries, food, and other goods. We will see more retail space convert to a dual use–retail and distribution. Order online and come pick up or have your order delivered. We will continue the trend of converting older retail space to alternative uses such as entertainment, med-retail and med-spa, warehousing, and other uses. Some people have realized that through all of this, they need less stuff. Less stuff, more quality time. This will impact retailers.
Rightsizing. Outsized. Spaced out. I believe we are going to see some rightsizing take place here. In the past, the rule of thumb used to be one worker per 300sf. This has declined down to one worker per 150sf. I think we are going to see us start to revert back to more square footage per worker. Cube farms and call centers should be rethinking their space allocation now. You may find it more difficult to recruit potential employees into a smaller cube space in a high density layout. More open space and separation will be sought after by employees (Spacing Out). How about working virtually? Well, while most might have enjoyed this, I believe there is generally a desire to get back to the office, to be in a collaborative environment and to be able to better focus without distraction. We see that in our own office as well. This virtualization trial run is going to have an effect on space needs. Some may find they don’t need all of that space to operate their business (Outsized). They may look to reduce their overall space footprint as more of their employees decide to work virtually some days and yet still have an office they can come into. Maybe something similar to an executive office space area within the main office space that is used when employees want to come into the office, but don’t necessarily need a dedicated office or cube for their exclusive use. Also, I think we will see more of a surge in tele-medicine that will affect medical office layouts. The urban to suburban flight will have a more positive impact on St. George as office workers in urban areas who enjoyed working virtually will realize they can do so from anywhere. Why not move to an area like St. George and enjoy the quality of life, climate, outdoor activities, etc. while you work virtually?
I had a great conversation today with my good friend and mutlifamily/investment expert in SLC, Mark Jensen. If you are thinking of doing any multifamily work on the Wasatch Front or SLC, he’s the guy. So many thoughts and ideas came out of our discussion. We are considering student housing as well as multifamily, but there will be a widening gap in how those two subsectors are affected. Some thoughts and questions to consider in this sector…with the acceleration to online learning, how is this going to affect our on-campus and off-campus housing? Is everyone going to want to go back to urban high density or are we going to see a shift back to more suburban multi-family? For those staying in high density urban, they will want to avoid mass transit and will start to look more closely at live, work, and play in a short distance with amenities being more on-site. How about seniors in senior housing? There will be reluctance by some to move mom and dad in to certain nursing facilities without some changes. High-end vs mid to lower range housing? Lots of questions in my mind rolling around here. It really depends on how long this virus situation plays out. There will be a direct corollary between the duration of the virus and the amount of change that will occur in this sector. The longer the duration, the more dramatic the change.
So what are going to see? First off, we believe that valuations are going to be down slightly if you are looking to sell, and flat if you are planning to hold. We still don’t have enough multifamily and apartments to house people coming into the rental market. All this talk of mass delinquency in April? Didn’t happen. 92% of rents were collected across the Wasatch Front. The highest delinquency was 12% with 88% of rents being collected. Less folks are moving out. Some, who had given notice, said, nah, nevermind, I think we are going to stay put. Who wants to move in this environment? Rates should hold flat to slightly down, depending on the project. Basically it will feel like we have punted on rent growth for the next few years. When financing, more equity is being required and the financial underwriting requirements are tighter. The discussion in financing isn’t so much underwriting growth or value add anymore. The California effect is real and is only going to intensify. Rent control, can’t evict anyone, etc. There is discussion now in the government there about a 25% rent reduction across the board. Crazy. Multifamily investors are going to jump ship in California and come where…you got it. Utah is going to see increased activity for sure. Funny story…Mark was talking to an owner out of NYC. His multifamily valuation has essentially been flat since 2008. Why? A 135% increase in property taxes. That’s ridiculous. It doesn’t take too long for guys like that to figure out it would be better to place money in other markets. What else, high end multifamily, depending on the location, may see some softening. You might see an adaptive-reuse of some hospitality and cruise ships to multi-family, hospital, or other uses. You are already seeing adaptive-reuse on some hospitality properties with places like LA where they are buying up hotels and converting them to homeless shelters. Extended stays are getting converted to apartments.
I want to hear your thoughts. What do you think will be different for your space needs? What do you see happening in different sectors? Shoot me an email or call me and let me know.
It’s time to start thinking “what-if’s” and set your business and property up to thrive rather than just survive in the coming new normal. Let’s get in touch and strategize!
Here’s to a renewed 2020!