Current Challenges & Opportunities in Commercial Real Estate

CRE property
February 15, 2021

The pandemic’s impact on the global economy has made 2020 a tumultuous year for the commercial real estate (CRE) industry. And with economic recovery depending on the success of a vaccine roll-out, it remains uncertain how long the current downturn will last.

How do you position your business to survive what’s ahead?

In this blog, we discuss some of the most dominant CRE trends that may help give investors insights on what to expect and how to prepare for 2021.

The economic & Political Backdrop

As of this writing, there is a marked contraction in economic activity due to a new variant of the virus in Europe and South Africa. The economies of more prominent Asia Pacific countries like Australia and Japan have not quite bounced back. On top of this, tensions between China and the United States are creating geopolitical shock waves.

Economic forecasts from Deloitte expect an uptick in US economic activity by mid-2021—but only if a vaccine for COVID-19 is successfully distributed. But because of the logistical challenges involved in the deployment of a vaccine, economists are pessimistic, saying that growth will likely remain constrained for the rest of the year.

Effects on Commercial Real Estate

The virus similarly impacts the CRE macro environment. Overall, CRE deals worldwide declined by 36% due to uncertain pricing and global economic stagnation.

  • Interestingly, the last year has shown a dichotomy in the profitability and fundamentals of different property types. You know it has positively disrupted healthcare, cell towers, data centers, and industrial real estate. On the other hand, the office sector, retail, and hotels bore the economic decline’s brunt.
  • Prices are starting to show early signs of stress in property types that have been more negatively impacted. Office and retail price indices in the US declined by 0.5% and 4.1% year on year in August 2020. In contrast, the industrial property index saw a significant increase of 7.4% year on year.
  • Rent collections in several sectors are still at healthy levels—but only because of leasing concessions and higher tenant incentives.
  • Debt markets are still sufficiently liquid. But despite this and the fact that most CRE companies had solid financials when the pandemic started, troubled loans continue to rise. Banks have begun to tighten lending standards to protect themselves against higher delinquencies, so it may become harder to secure funding for commercial real estate projects from traditional lenders.

Opportunities to Invest in Digital Transformation

Due to lockdowns in 2020, many companies in the CRE industry had to accelerate their technology adaptation by moving to remote work. Tenant communications were done online, property tours started to be done virtually, software and cloud technology was also deployed for managing day-to-day operations.

These measures prove to be extremely helpful in improving tenant satisfaction and ensuring business continuity. Because of this realization, CRE companies that are serious about thriving in the new normal are starting to develop digital strategies and road maps for 2021 and beyond.

There’s an opportunity to enhance the agility and skill of CRE companies. The focus should be placed on the digitization of key business processes and tenant experience enhancement to succeed. Developing a structured digital strategy that uses smart data analytics can produce more meaningful results.

  • CRE companies can use mobile apps to increase tenant engagement. Such apps can help provide tenants with real-time updates and develop a deeper sense of community. Interactive apps can also significantly increase the efficiency of communication between tenants and landlords. Cloud technology can be deployed for added scalability, access, and easy data storage.
  • CRE companies can likewise use data analytics to generate insights that will enable them to make smarter decisions and enhance the tenant experience. For example, analytics can be used to determine how tenants utilize different amenities. It can also be useful in analyzing tenant behavior and engagement levels to understand their preferences and ultimately provide a highly customized experience. Landlords and operators can analyze the temperature sensor data, occupancy, and movement, for example, to collaborate with tenants in creating pandemic-safe utilization decisions and seating arrangements.

Opportunities to Change Gears

Changes in end-user and tenant preferences will likely influence leasing demand going forward, long after COVID-19 is gone. Here’s what’s currently happening:

  • A growing number of companies are rethinking their use of office spaces. Experts say that employees are likely to continue working remotely to fulfill individualized tasks, and most offices will only be used for team-based activities and face-to-face interactions. This is not surprising, given how 60% of employees claim that they prefer to work remotely even after the virus fades. Almost as many respondents also say that they would rather not travel for work if videoconferencing will suffice.
  • The demand for office, retail, and hotel spaces may experience double-digit declines in leasing activities because of these trends.
  • Market dynamics are also shifting as people start to avoid crowded cities, including New York, Toronto, Paris, Tokyo, and San Francisco.
  • To survive and even recover in 2021, CRE companies have to reposition the value of their existing commercial real estate spaces. They also need to focus on improving operational efficiencies and managing costs.

Conclusion

CRE businesses will do well to reassess their property’s value propositions. Even if the pandemic ends tomorrow, it has already created long-term shifts in tenants’ and end-users preferences and behaviors. Investments in digital technology can potentially help cut costs while increasing engagement.

CRE companies also have to find ways to cut operating costs while staying compliant with health and safety best practices. All these combined can help CRE companies overcome the formidable challenges of COVID-19 to gain momentum in 2021.

We will continue to monitor trends and regulatory changes that can affect the commercial real estate industry and blog about them here. If you would like other topics discussed, please let us know by sending a message, and we will be glad to cover them.

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