The Economic Impacts of COVID-19 on Commercial Real Estate
Over the last few months, Matthew Gardner has kept us updated on how COVID-19 may impact home prices and mortgage rates, as well as the rental market and economy at large. Last month, we looked at how the governor’s Stay Home, Stay Healthy shutdown order affected real estate in Seattle and on the Eastside, as well as the luxury and new construction markets.
As businesses across the state transition into phases of reopening, many have been wondering how commercial real estate has weathered the coronavirus pandemic and economic shutdown. The W Report spoke with Tiffini Connell, Principal and Managing Broker at West Coast Commercial Realty, a business partner of Windermere’s co-presidents, to get an inside look from someone on the front lines of commercial real estate in our region.
All in all, our region’s real estate markets remain resilient. Residential real estate has recovered from temporary reductions in sales seen in the first few weeks of the shutdown and, according to Connell, the outlook for the retail commercial market is currently looking optimistic as well.
W Report: What are you seeing as short-term and long-term impacts of COVID-19 on commercial real estate?
Tiffini Connell: While it’s hard to say what exactly will pan out at this point, there are some factors to watch that look encouraging and opportunistic, at least in the retail sector. Low to mid-range investment purchases have some upside right now because of lower interest rates and SBA funding, so owner-users in particular might find some great opportunities. On the retail and small office leasing front, we are seeing many landlords giving incentives to bridge what we are hoping will only be challenging in the short term.
Most (tenants and landlords) believe that pent up demand will return us to a strong market relatively soon, as compared to the last recession.
Incentives, such as longer build out periods or reduced rent during phased openings, currently seem to be a good compromise between what tenants are needing in the short term, while leveraging the benefit of the location and opportunity for them and also preserving the landlord’s longer-term investment.
WR: How has COVID-19 impacted long-term demands for office space?
TC: I think it’s still up in the air. I don’t think it’s set in stone that WFH will be a long-term trend. I keep hearing that it will be a longer-term trend in the mainstream, but that’s not what I’m hearing at my micro-conversation level. Many people, especially younger workers, are showing signs that they want to be back at the office, but maybe with a more flexible work schedule. Additionally, there has long been a demand for small office space in neighborhood locations and I think this will go up as people decide they want to work out of their house, but they don’t want to work far from home. I am seeing this uptick in calls recently and I expect this to continue.
WR: How has retail been impacted? What are your predictions for brick-and-mortar?
TC: I’m in my 17th year in the industry and nothing stays the same. Retail in particular is not for the faint of heart. It’s built on a combination of need, desire, value, connection and constant change and innovation. They provide tax revenue, jobs and needed products and services to the communities we love while balancing changes in supply, demand, workforce, delivery, governance and competition. Bottom line, retail has been around since barter and trade and it’s not going anywhere. In my opinion, it’s one of the most creative, flexible and resilient industries and the landlords, buildings and land that can give them the chance to stay flexible will be in high demand.
So, while this period has presented some new challenges, it’s definitely not a new narrative. If you live, work or invest in retail real estate, you have to be comfortable with change. Our society has proven time and time again that we love our bricks-and-mortar retailers. The trends continue to support this model. They adapt. We adapt. If we stay flexible and responsive, we can thrive.
WR: Restaurants have been interesting to watch during this time, because their business models shifted quickly in response to the shutdown. What are you seeing as long-term impacts on restaurant spaces?
TC: Restaurants have proven themselves to be the cornerstone of our communities for generations. They are working hard to change their operational models as we speak, and many have thrived during this period and will continue doing so. Those that fail, often — though not always — had issues prior to the pandemic and this was, unfortunately, the coup de grace.
I would never want to make light of the very real issues and very real pressure the industry is under right now, but, like many things in life, there are shining examples of resiliency and opportunity all around us. In just the last two weeks (ever since we could start to show commercial property again) over half of the incoming calls on available space that I have listed have been from restaurants. Most of the deals I am working on advancing right now are with this category.
Restaurants have been the backbone of community retail and will always be the case. They will look different and they will have different needs and demands, but the category will continue to be something we as an industry and a society will find benefit from in supporting.
WR: Do you have restaurant clients who were about to start buildouts that are forging ahead? Or holding off?
TC: One of my regional restaurant clients is going to sit tight for a while. But a different multi-state, independent operator is forging ahead. They were able to pivot quickly to a delivery-only model and, in some cases, sales increased. I use these two examples, because it’s fairly indicative of the types of situations out there. Some will sit tight and build reserves, some will pivot the model and go chase deals.
There are also some who will have opportunities to lease locations that they might have previously been in more competition for. They now have a better chance at securing these locations, which will drive expansion. And, sadly, there will be fully built-out spaces that will be vacated. But that provides a great foundation for the next business to plug-and-play. It’s a mixed bag, but it’s not all doom and gloom.
WR: How are grocery clients faring due to COVID-19?
TC: Grocers don’t share sales data because the industry is so competitive, so this information is really held close to the vest. In general though, I have heard that grocery is up 25% nationally. I’ve also read that hardware, housewares and alcohol sales are all up. I’m aware that many regional grocers continue to look at expansion opportunities. PCC, a personal favorite, just opened their newest location in Seattle’s Central District this week.
WR: How has the pandemic affected your listings that were active before the shutdown? Now that commercial real estate is reopening, is there an uptick in interest?
TC: We continued to see regular interest and advancing of deals throughout the shutdown, but we did experience a total stall during the second half of April before the Governor released the Phasing guidelines for re-opening. There was good momentum prior to that, because many people felt this will ultimately be a short-term crisis. But without a plan, people became very reluctant to make their own plan. It was understandable. Once the guidelines were released, activity increased again, and it has been like a firehose since we’ve been able to show property.
Like residential real estate, there is pent up demand. Will that translate to signed deals in a time frame we are used to seeing pre-pandemic? I don’t know yet, but strong activity tends to indicate a higher probability of deals closing. People in my world don’t tend to want to see spaces unless they are going to move forward, so I am feeling optimistic.