The COVID-19 Pandemic’s Effect on Real Estate
How does the real estate market look during a global pandemic? Adam Palmer gives his take on our previously published white paper, Into The Blue. Read this response post for insight into how American life will change due to remote work, an exodus to the suburbs, and the already-in-motion eCommerce boom.
If you were to guess that the state of the real estate market is suffering as a result of the COVID-19 pandemic, you wouldn’t be completely wrong. Globally, cross-border real estate investment declined 33% in the first half of 2020 compared to 2019.
But the reality of real estate in mid-pandemic times still contains some surprises. While office and store closures have left a hole in the commercial real estate market, many U.S. cities report an impressive rebound in the residential real estate market. SpeciSomencreasing demand in commercial real estate, as well. Let’s in cities like San Francisco and New York take a closer look at just how the U.S. real estate market is faring and how current trends will impact American lives in the years to come.
Residential Real Estate
After nationwide shutdowns in late March, many prospective home buyers and sellers put their plans on hold, no doubt due to the intense economic uncertainty, post-traumatic flashbacks from the 2008 financial crisis, and frankly, not wanting others to be in your home.
However, while the sustained record-high unemployment rates, the US residential real estate market has held amazingly steady in the most recent half of the pandemic. Realtors in the greater Washington D.C. area report a burgeoning demand for homes in the suburbs with ample home office space at the <$2 million price point. The Chicago suburbs have also witnessed an impressive real estate market, where the Greater Northwest Indiana Association of Realtors reports high demand and very few houses to sell. Employees no longer need to make a five-day-a-week commute to the city, a home in the suburbs is an increasingly attractive choice for many. The discrepancy in tax rates from one state to the next is also becoming more influential towards where people want to live.
What About the Cities?
In the coming decade, suburban dwellers can expect to see their usual Sunday-morning grocery store trips start to look a whole lot busier. In addition to the residential real estate trends brought on by COVID-19, millennials are also growing tired of city life and moving to the suburbs. The U.S. will experience nationwide growth in suburban areas. Suburban apartment and office vacancy rates in the US dropped below that of the same categories in downtown central business districts for the first time on record.
But this doesn’t mean that cities will empty. Although COVID has given people the time and perspective to reconsider just how much they enjoy their current living situation, urbanization has been a steady trend for years. The COVID-19 pandemic might influence migration patterns and population distribution within metropolitan areas, but the global urbanization movement can’t be slowed. The majority of the world will still live in urban environments by 2050.
Commercial Real Estate
Virtual Work and the Unused Office Space
As many companies have come to trust their employees’ productivity while working from home, a growing number of high-profile businesses have committed to a permanently virtual workforce. Twitter and Facebook announced a transition to permanent virtual work early on in the pandemic. Perhaps an unlikely third addition to this list is Nationwide Insurance, which closed its five regional offices and committed to permanent work-from-home in June. Based on data from a Chameleon Collective survey, 25% of respondents anticipate shifting to permanent, 100% virtual work after the pandemic. This is a jump up from 8% before the pandemic.
Some experts predict that office space rentals will fall by 20% in cities like San Francisco and New York. In New York, lease signings for the first eight months of 2020 were about half of what they were in 2019. As companies rethink their genuine need for office space, commercial landlords have begun to offer shorter-term leases, incentives, and lower prices to compete with shrinking demand.
Where will the Workers Go?
Perks aside, working remotely in 2020 means that your relaxation space and your workspace are the same. Remote workers who could use a change of scenery can head to coffee shops, libraries, and public parks, but that’s many remote workers in limited space, especially with social distancing restrictions. And after the pandemic passes, businesses will need to reach a middle ground with employees who will likely prefer somewhere between 100% virtual work and 100% in person. A recent study by Marcus & Millichap stated that as many as 30% of the Country’s workforce would prefer to work from home at least three days per week.
Remote workers will represent an entirely new category of consumer demands over the next decade. Employers who can offer an enjoyable work-from-home experience will become more attractive to job applicants, and innovative ideas like WeWork will help soothe the pressure of remote workers to stay connected and productive at their job.
Virtual meetings and a rush-hour commute of zero minutes won’t mean that other modes of real estate will suffer. ECommerce had already begun to replace in-person shopping experiences before the pandemic, and warehouse space had been rapidly constructed to accommodate this —329 million square foot of warehouse space was built in the U.S. last year. Pandemic-induced store closings only accelerated conventional retail’s demise. Both distribution and fulfillment centers and the “last mile” warehouses located in urban areas will grow. Indicative of the tension between eCommerce and the in-person shopping experience is Simon Properties converting its unused department store space into fulfillment centers for Amazon.
Real estate industry trends will have a lasting impact on how we eat, shop, invest, live, and work. Restaurants, both small and large, have been severely thinned out due to restrictions on in-person dining. The indoor shopping experience will continue to dwindle as it reaches an equilibrium with the booming eCommerce industry. Property prices and demand will fluctuate dramatically as city, suburban, and rural residents think critically about where they want to live. The increase in remote workers will introduce a whole new array of consumer demands for innovators to act on.
The future is far from clear, nor is it set in stone. Instead of seeing the future clearly and in detail, we can infer the direction in which the world is turning by taking a deep dive into historical trends and recent data, piecing together the puzzle as best we can while changing our hypotheses as new data arises. It is as vital as ever for businesses to remain innovative and agile.
To help navigate these murky waters, Chameleon Collective created an inspiring, comprehensive report entitled “Into The Blue – A Guide to Business in the Post-Pandemic World.” The report offers a deep(er)-dive into how business, industry, and the way we go about our day-to-day lives will change in light of the COVID-19 pandemic, and I recommend it to all. Click here to download the full report and gain insight into how we live, work, and love will change in this time of transition.
Adam Palmer, CCIM, SIOR (Managing Director, LandQwest Commercial)