COVID-19 has frozen everything in commercial real estate over the past 4 months since the pandemic started. Business as usual was turned upside down as retailers closed, unemployment soared and office buildings vacated. The economic effects of the pandemic have sent devastating shockwaves through every area of commercial real estate.

And, we’re still in the middle of it. With spikes in COVID cases happening in multiple states, governments are considering shutting businesses down again, which will continue the negative downturn of the industry. We’re truly in a state of treading water, waiting to gain control over the spread of the disease, so that lenders, property owners and buyers can continue working with their investments.

Lending has started to pick up again, but there is a shortage of inventory. Sellers are reluctant to cut their sales prices, even while buyers wait for deals to come available.  Many deals were pulled off the market to wait and see where the market ends up, as well as how the rent freezes play out in terms of return on investment. 

Retail

The retail sector has been hit particularly hard by the pandemic, especially merchants and restaurants. According to the Portland Business Journal, Portland could see it’s independent dining industry shrink by 85%. Being forced to shift from dining to take out only has led restaurants to lose a huge amount of income, and it doesn’t look like that’s going to change anytime soon, especially if more closures are in store in the future. Portland landmark restaurants such as Montage in Southeast Portland have announced permanent closures.

Retailers have been working with landlords to negotiate flexibility with their rental agreements. Some have asked, for example, to have their rent payments tied with sales revenue for a specific period of time. Other tenants are deferring payments until they can reopen or recover. While keeping a tenant is a much more appealing alternative to having to find a new tenant for a space, the effects of negotiating lease agreements have a significant impact on property owners, especially the smaller “mom and pop” operations that don’t have a huge surplus of money saved for such an emergency.  

It is quite possible that the vacancy rate this fall and winter will be especially high, and those vacancies will be on the market longer. The buildings that will be successful are those with tenants that have not been as affected by the pandemic, such as banks and insurance companies. 

Multifamily

Since the pandemic started at the end of march there have been approximately 10 multifamily deals that have closed in Portland, ranging from 10 to 200 units with four of them being new construction. The remaining 6 closed in March or April, meaning they were already close to the final stages of closing.

Landlords have had to negotiate lower rents and rent deferrals due to huge spikes in unemployment. A large portion of renters are in the service industry, earning hourly paychecks, and many of whom live paycheck to paycheck already. Fannie Mae and Freddie Mac have tried to mitigate some of the fallout by offering forbearance options to those whose mortgages are backed by the organization. This has helped alleviate some of the pressure, but not all.

Additionally, the amenities that many property owners used to rely on to market their buildings, such as fitness centers, pools and communal office spaces, are now off the table given the current need to mitigate the spread of germs as much as possible. Combine that with the shift in renters’ priorities to find affordable apartments to rent rather than those with luxury amenities, and the inability to provide in-person tours, the likelihood of delayed rentals is quite high.

Office

The future of the office sector is a bit more nebulous than the others, as there are two sides of the tenant coin as it relates to rental agreements. First, there is the group that does not want to renew their leases and continue to have their employees work from home. Then there is the other group that can’t wait to get back to the office and out of the home. Because the impact is less direct than the dining/retail sector, since many office tenants are still in operation, the future may be more stable than the retail sector.

However, the one segment of the office sector that will be dramatically affected is coworking spaces. According to Business Wire, the global coworking space market is expected to decline by about 12.9%. The reason is obvious – an open space with a constant stream of short and long-term renters makes it challenging to control the potential spread of the disease through these spaces. Additionally, many renters of these coworking spaces are freelancers, independent contractors and startups, who A) don’t necessarily need to operate in a shared space and B) may have had their own business revenue decrease, forcing them to shift to home-based operations. 

While some Portland coworking spaces have made adjustments to maintain cleanliness and social distancing, others have closed permanently.

While some are hopeful that once a vaccine is available, conditions will improve. But, the fact is that we are still in limbo, and the environment changes daily. Once the disease has reached a certain level of control, things will begin to improve, but the effects of a recession and the road to recovery often last much longer than the recession itself.

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