Commercial real estate is one of the worst-hit markets due to the 2020 pandemic. Anytime there is a real estate meltdown, it triggers a massive recession. However, this one is slightly different. It accelerated the anticipated recession and impacted certain sections of the job market. Consequently, the world has gone into a recession from which it will make a V shaped recovery. During the recession, economic policies, market consolidation and segmentation and domain evolutions will have been completed resulting in a launchpad for businesses to spring back into life for another decade. It is important to understand the evolution of commercial real estate business to better prepare for revival.
Real estate is classified into residential and commercial real estate. Residential real estate is not hit too adversely as its non-optional and people were successful at maintaining it. Commercial real estate on the other hand, one of the top expenditure overheads for a company, has lost its purpose with globally workforce going fully remote. Having conducted remote work for long enough now, companies space priorities reached a new norm, especially coming from sizable savings for both workforce (time & money) and for companies (rental expenditure & maintenance costs).
There are downsides to the workforce fully being remote, like extreme difficulty in building a one team culture especially with newer people coming onboard. In long term, this will impact companies the worst as the team bonding is very superficial in remote mode.
Consequences of this are evident with the need for higher investments in middle management layer for supervision becoming obvious.
Companies will pursue a hybrid work model post the pandemic, with increased liberty in work from home policy, mandated minimal work from office and optional work from office days. That will reopen the demand for commercial real estate once again with companies looking to reopen office spaces for workforce to come in mandatorily for certain period every year.
Commercial real estate will undergo the following evolution and impacted by these factors.
- Addition to net new space to the market
- Forced market conditions to redo renting terms
- People’s location preferences (commute, amenities, community, and glamor)
- Addition of net new companies to the market
- Confidence in spending
Movement from Phase 1 to Phase 4 will be 2-3 years at worst. During this time, commercial space providers should not undervalue their properties by extremely discounting the rents unless their financial equation is tightly tied up and failure to make something will lead to foreclosure. Based on the size of their space, strategy must be planned accordingly. At the end of the day, regardless of the space size being provided, owners must do two things. One, reinvest in your property further for it to continue to be a performing asset and two, come together as a group to prevent renting numbers to fall below 50%. Failure to prevent 50%+ drop will lead to 7-8 years of recovery time. Resistance to invest in your property further will absolutely make it a less preferred option. Eventually 7-8 years down the lane, numbers will come back to where they are today with natural YoY appreciation in market conditions.
(Source: Times of India)