2020 has been an unprecedented year, and, while there are likely more twists and turns to come before December 31, it is essential to look at how the real estate markets have changed this year and which trends are likely to continue into 2021. The COVID-19 pandemic has impacted nearly every industry, including commercial real estate, and its impact will continue to influence the market and commercial real estate long after the virus has been eradicated.
Commercial Real Estate Loan Modifications
As the United States’ economy stalled, shut down and slowly started to recover throughout 2020, many businesses were negatively impacted, and most property owners found themselves negotiating with both their lenders and tenants. As tenants were unable to pay rent, property owners were unable to service their debt, which led to a surge of loan modifications this year. This trend certainly will continue through the first half of 2021, as the economy continues to recover.
Commercial Lease Modifications
Due to the COVID-19 pandemic, a large sector of the U.S. workforce spent most of 2020 working from home. This shift, combined with the economic downturn, led to many commercial landlords agreeing to rent deferrals in the short term, which typically are to be reimbursed by tenants over the remaining term of the lease. This trend is likely to continue into 2021, as tenants facing continued economic difficulties will require temporary solutions for their inability to pay rent, and as demand for commercial space will slowly begin to drop, landlords are likely to accept such temporary solutions.
While tenants’ inability to pay rent is an immediate issue, the shift to remote working could have long-term effects on the commercial leasing market as well. As these leases begin expiring, landlords can expect to see a drop in demand for office space from tenants needing less space for fewer employees. However, this drop in demand may be offset by tenants’ need for less public and shared space and more private offices and sufficient space for employees to comply with social distancing guidelines. As employees become more proficient at working from home, the number of employees commuting into the office every day may decrease. Instead, “hoteling” (the sharing of a few unassigned offices in a more efficient commercial space) may become a more popular and cost-efficient structure for tenants, and property developers may look to incorporate this style of office arrangements and set ups into newly designed office locations.
Adoption of Technology and Creating a Safe Environment
A shift in the commercial leasing market from the traditional office structure to “hoteling” will depend on property owners providing adequate safety measures to ensure that their tenants feel comfortable and safe using their space every day. Many property owners have adopted COVID-19 policies (such as temperature checks and distance and direction markers) for shared spaces, and hand sanitizer dispensers have now become commonplace.
However, in order to continue to appeal to tenants, property owners will need to quickly understand and adopt new technology to make their offices as safe as possible, while balancing their tenants’ need for efficient screening and procedures. If the safety procedures and policies are overly burdensome (i.e., long lines for elevators and restrooms, inadequate ventilation or the inability to move around the office floor while maintaining social distancing), then the demand for commercial office space could continue to dwindle. This new technology can include (i) pre-entry wellness and temperature checks using facial recognition or touchless kiosks, (ii) touchless entry for admittance into the building, elevators and floors, (iii) autonomous cleaning solutions to spray disinfectants and sanitation robots, (iv) upgraded air filtration systems and UV light cleaning and other smart building tools. Property owners’ adoption of technology and building systems related to safety and wellness is likely to continue through 2021 and years after. Property owners who understand that tenants will require these systems and invest in the necessary technology early are likely to appeal to a broader range of potential tenants.