4 Ways the Coronavirus is Changing Commercial Real Estate

COVID-19 has upended the world, and commercial real estate hasn’t been immune from the effects. As offices, hotels, restaurants and many retail stores and malls sat empty — and activity in warehouses escalated in response to the surge in e-commerce — COVID-19 has radically altered the industry’s long-term expectations. Here are some significant effects that are likely to linger and how they could transform commercial real estate.

  1. White-collar business trends

Many companies have found themselves operating in unprecedented ways to continue conducting business. For example, businesses that had been resistant to remote work were forced to turn to it. Those that have done so successfully may pivot to a smaller on-site workforce for the long run, reducing their need for pricey office space.

The layout of office space likely will change, too. For starters, the trend toward open-space floor plans could come to an abrupt halt due to fears related to the spreading of contagion. Municipalities might introduce new standards for square footage per person, as well as the amount of enclosed space and HVAC. Air filters already commonplace in health care settings could be incorporated into office buildings.

The change in business practices also could have repercussions for the hospitality sector. With business travel largely restricted, companies may have discovered that videoconferencing can be as effective as in-person meetings. And international travel might fall off if businesses increase their reliance on domestic supply chains (which could boost demand for warehouse and manufacturing space).

  1. The retail shift

The threat of e-commerce on brick-and-mortar retailers isn’t a new topic, but the pandemic may have accelerated the discussion. Stay-at-home orders prompted many people to shop online for items they hadn’t previously, such as groceries, and many are expected to retain the habit.

It’s not all bad news. While the demand for physical stores continues to drop, the demand for the data centers that power online shopping and “last-mile” warehouses that facilitate quick delivery could grow. Some investors already are eyeing distressed properties, like big-box stores, that can be converted to industrial use.

  1. Safety and health concerns

The COVID-19 crisis has validated the fears of germophobes. Regardless of the property type, many tenants and buyers now will have safety and health at the front of their minds. For example, they’ll expect regular deep cleaning and sanitizing practices and the ability to “social distance.”

Touch-free technologies — such as voice-activated elevator buttons, automated bathroom doors, and motion sensors for faucets, soap and paper towel dispensers — are in the spotlight. Increased sensitivity to surfaces as potential carriers of germs also might drive a preference for spaces equipped with tools to move content from individuals’ personal devices to big screens viewable by more people without needing to touch wires or connectors.

Designers may begin to employ antimicrobial materials, like copper, more often for hardware and minimize tough-to-access (and therefore clean) corners or other places where pathogens can collect. Designers, urban planners and the like also need to keep in mind what could be a lasting aversion to “densification,” the dense occupation of space that had been growing in popularity in some areas.

  1. Tenant negotiations

Tenants experiencing financial difficulties are looking to their landlords for lease concessions or rent abatements. It may be tempting to institute sweeping policies that apply to all tenants (no concessions for anyone or a 10% abatement for everyone). But the smarter strategy is to make decisions on a case-by-case basis.

Landlord decisions shouldn’t always be ad hoc, though. Landlords need to develop a decision-making protocol that factors in the tenant’s long-term prospects, renewal probability, default probability and building occupancy rate.

Breach of contract or force majeure?

The COVID-19 crisis has interfered with the performance of many real estate agreements, from development deals to construction contracts. Some parties may wonder if force majeure clauses provide protection from costly breach claims.

Force majeure clauses shield a party from liability if it can’t perform due to an event that was unforeseeable when the contract was entered. The clauses typically identify specific events that would trigger the protection, including natural disasters, fire, epidemics, strikes and acts of terrorism or war.

Performance delays or failures generally are excused only if attributable to one of the specified events. For example, a construction contract’s force majeure clause wouldn’t apply if it lists only wars and strikes, and a pandemic caused a breach. But, the clause might apply if it includes governmental orders, and a stay-at-home order halted construction. Bear in mind that, even if force majeure applies, a party may only be allowed to delay its performance, not skip it entirely.

Don’t wait

Owners, operators and developers can’t afford to take a wait-and-see approach to the coming changes for commercial real estate. Take action now to position yourself to thrive in the new landscape.

Contact Nick Sarinelli, CPA, CFE or Doug Collins, CPA on (973) 298-8500 or visit our real estate services page for more information.

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