Archives for June 2020

The COVID-19 pandemic—and its impact on businesses over the year ahead—is the leading concern among commercial real estate executives, according to The Counselors of Real Estate.
The Counselors, a commercial trade group for CRE designees, surveyed its members to identify current and emerging trends in the commercial sector for its annual list of issues affecting real estate for 2020–2021.
“The change wrought by the COVID-19 crisis and its aftermath will teach us about priorities, resilience, and demand in ways that we did not dare test before,” says Michel Couillard, 2020 global chair of The Counselors of Real Estate. “In examining real estate markets, we must consider existing fragility, adaptability to new demands, and potential relevance to new markets. Demand will be defined by the extent to which this crisis leads us to abandon old habits and adopt new ones. The duration of the lockdown has been a factor, and so is the confidence with which we emerge.”
Here are the 10 issues that will likely shape the commercial sector over the coming year:
1. COVID-19
The full impact on the real estate market is still unknown, but the pandemic will undoubtedly reshape the commercial sector in several ways. For example, the report notes that the demand for office space may decrease if remote work continues to increase. On the other hand, there could be an increased demand for larger spaces to reduce density in businesses and public places such as airports, restaurants, banks, and some offices as people continue to social distance.
2. Economic Renewal
“The challenges facing the economy and the real estate industry are deep and persistent, with leisure and hospitality, retail, construction, and air travel seeing slow and partial rebounds into 2022,” Couillard says. The impact of the economic lockdown on state and local tax revenues could reduce non-federal government employment levels and delay infrastructure projects.
3. Capital Market Risk
The last four months have presented a lot of volatility in the capital markets, but it also has confirmed how quickly debt and equity capital liquidity can stop flowing when risk and returns are difficult to measure, the report cautions. “One thing we have seen since March is that volatility has spiked, which makes pricing debt more challenging,” Couillard says. “Federal intervention helped to limit a complete seizing of the markets, but doesn’t necessarily mitigate the longer-term concern about defaults and losses. While pricing stability and liquidity appear to have somewhat returned, late payments and loan defaults have seen a significant increase.”
4. Public and Private Indebtedness
Commercial real estate can be greatly affected by local indebtedness funded by local taxes. The U.S. national debt has increased to more than $26 trillion in just six months. Total state debt is about $1.2 trillion, and local debt is nearly double state indebtedness at $2.1 trillion. The level of debt brought on by the pandemic—“with trillions more ahead in stimulus and fiscal rescue intervention—is not sustainable,” the report notes. “It will impact commercial real estate in many ways, from reduced demand for housing to interest rates that will eventually have to rise to attract new capital to fund our debt, to the ability to repair and upgrade our aging infrastructure and fund projects like 5G that will be essential to our future and U.S. competitiveness.”
5. Affordable Housing
There is a shortage of more than 7.2 million affordable rental homes for extremely low-income renter households (those with incomes at or below the poverty line), according to the National Low-Income Housing Coalition. Further, there is a shortage of affordable for-sale homes. CRE notes several solutions, such as expanding taxpayer-funded, one-time front-end subsidy programs for affordable housing, using the power of zoning to create subsidies to support it, and finding ways to circumvent “not in my back yard” opposition.
6. Flow of People
Reduced migration and COVID-19 behavioral changes could impact demand for residential, hospitality, and retail real estate. “The flow of people between and within countries has always been a critical driver of real estate and the economy,” the report notes. “Today, the world’s economies and people face unprecedented challenges to mobility.” Reports of urbanites fleeing the city due to concerns over the virus are growing. As such, companies may seek expansion in suburban areas to reduce mass transit reliance.
7. Space Utilization
The pandemic will likely have a lasting impact on the design and use of real estate space. “COVID-19 has stressed the use, location, mechanical infrastructure, and interior configuration of commercial buildings,” the report notes. A new focus is being placed on the health of workers, factoring in from the building entry to the indoor air quality, the report notes. “Acceleration of planned, medium-density, mixed-use communities will replace old retail formats, with design that embraces walkability and integration of uses that enable continued normalcy in case of subsequent lockdown orders,” the report notes.
8. Technology and Workflow
“The combination of migration back to the office, the need for reconfiguration and change in operating methods, and the general desire for working remotely are accelerating the adoption of technology in the built environment,” the report notes. Technologies will grow as essential, such as tracking people in buildings, contactless doors and elevators, air and water quality monitoring, airflow and recirculation control, mandatory remote building services, and health screenings for contractors and facility staff.
9. Infrastructure
Infrastructure needs are now being reassessed under a new lens. But funding will remain tight and is estimated to be underinvested by $15 trillion in global infrastructure by 2040. “Basic infrastructure needs will go unmet and potentially impact real estate values and development patterns as underserved locations become less livable and even undevelopable,” the report notes. Retailers are increasingly relying on online sales to drive revenues, and warehouse and distribution facilities will remain important to supporting their businesses.
10. Environment, Social, and Governance
This is a critical component of real estate investment, from looking to counter the risks of climate change to identifying ESG investment alternatives, the report notes. “While COVID-19 has underscored the importance of ESG issues, the new ‘norm’ is a result of trends already underway, including dramatically changing acceptance of the risks of climate change, innovations in the measurement and tracking of ESG performance, new innovative ESG investment alternatives, the growing influence of millennial investors, and substantial recognition of ESG initiatives from corporations,” The Counselors’ report notes.
Source: “Top 10 Issues Facing Commercial Real Estate“

The Albuquerque City Council decided on Monday that employers must provide masks but not hazard pay to their workers during the COVID-19 pandemic.
As for paid sick leave? That still remains to be seen.
A trio of bills offering worker protections during the pandemic each got a different result during a special meeting of the council on Monday night.
Legislation that would have required essential businesses with at least 50 workers to give “premium pay” to workers who make $12 or less an hour generated one of the longest debates during the 6½-hour session. But it ultimately failed on a 2-7 vote, with only its sponsors, Isaac Benton and Lan Sena, voting in favor.
The duo also co-sponsored a paid sick leave bill that had been scheduled for action Monday. They ended up withdrawing it – in part due to a procedural issue involving insufficient notification – but said they plan to bring it back when the council reconvenes in August.
Their original bill included an emergency pandemic provision requiring workers to get up to 80 hours of paid sick leave this year. But it also created a permanent paid-sick leave mandate beginning Jan. 1.
Benton said in an interview after the meeting that he wants to split the bill and pursue the pandemic provision again in August.
“I’m not giving up on that,” he said. “I think that’s a pretty important thing to highlight. The nice thing about that is for the most part it’s covered by the federal government.”
The Families First Coronavirus Response Act, in effect since April 1, already requires companies with under 500 workers to provide paid leave for COVID-related reasons, and reimburses the costs via tax breaks.
Benton said he still supports permanent paid sick leave but that he was still evaluating how to tackle that moving forward.
Several previous attempts to create an Albuquerque mandate have failed, though Bernalillo County passed a paid leave ordinance last year for the unincorporated areas of the county.
Benton and Sena did score on one of their worker protection proposals Monday – a mask-related bill they co-sponsored with Cynthia Borrego. The council unanimously passed the ordinance mandating that businesses require employees to wear masks and that they provide them to their workforce.
It also makes businesses post signage alerting customers that they must wear masks, though it does not require the companies to confront clients who do not comply.
“It’s unfortunate sometimes we have to pass this sort of language, but there’s a lot of people who don’t take this COVID seriously,” Borrego said.
The council supported the bill by allocating $1 million to purchase personal protective equipment for businesses with 50 or fewer employees.
A series of amendments reduced the penalty for noncompliance with the mask provision. Businesses would get only a warning for the first infraction, and the penalty would be $50 per occurrence thereafter.
The mask bill was the least controversial of the three bills Benton and Sena originally introduced June 15.
The premium pay and paid sick leave bills had drawn fierce backlash from business groups and owners, who argued the ordinances would pile on costs for enterprises still recovering from COVID-19-related losses and closures.
Several councilors echoed those sentiments, saying that workers will lose too if businesses ultimately fail or move away.
“Would we rather keep people employed … or try to force business owners who aren’t making money to pay those employees more?” Councilor Trudy Jones said. “It’s a simple decision. They’re going to let people go. They’re going to close their business. They are going to leave Albuquerque.”
But proponents argued the legislation provided critical benefits to the city’s lowest-paid workers, saying that many of them have been on the front lines of businesses that stayed open during the pandemic.
Sena said that many such workers are people of color and those who were already struggling to make ends meet before the pandemic and are now facing exposure to a potentially deadly virus that is greatly impacting minority communities.
“We should be investing in our workforce, in our lowest-income families, because they are being disproportionately impacted,” she said.
But Don Harris countered that such workers are the most vulnerable when businesses are struggling.
“They are also people who are most likely to get fired or most likely to lose their jobs because we interfered with the economy,” he said.
Though the council is meeting virtually and not offering in-person public comment, it did receive 364 pages of written comments ahead of the meeting.
Many businesses wrote to detail their objections, with the Baca family of Bueno Foods saying the premium pay and sick leave bills “would add expenses that exceed by far our business profitability in a normal year” and expressing fear that they couldn’t share the higher cost with customers because their clientele would turn to “lower cost products from companies located in other parts of New Mexico or elsewhere.”
Source:  “Councilors: Employers must supply masks“

This conversation between Anjee Solanki, national director of retail services at Colliers International, and Neil Saunders, managing director at GlobalData Retail, will look at what the pandemic has done to retail globally.

Before the COVID-19 pandemic reached New Mexico in March, co-working company FatPipe had 90 people working remotely at its Albuquerque and Rio Rancho locations.
By the height of the pandemic, however, FatPipe chief operating officer and director Lisa Adkins said just three workers were coming into the Albuquerque space, after the company allowed workers to sever their leases.
Founder Stuart Rose added that the numbers have begun to recover as offices around the state have begun reopening, but said it will likely be a while before things return to pre-virus normal, if they ever do.
“Our takeaway … is that people largely don’t know what they’re going to do in the future,” Rose said.
While offices like FatPipe, which rents space to workers on a monthly basis, may be hit harder than most by economic impacts associated with the pandemic, they aren’t the only ones adjusting to a new normal.

The pandemic has quickly reshaped the office experience in Albuquerque and across the country, forcing a large number of workers to work remotely rather than coming into the office every day.
At companies like Albuquerque architecture firm Dekker/Perich/Sabatini, the vast majority of the 180 workers at the firm’s main Albuquerque office have continued working remotely even after offices were allowed to partially reopen at the start of June, either out of caution or because workers prefer the experience of working remotely.
“Everyone’s been so effective working from home,” said Andrea Mayhew Hanson, a principal in charge of workplace strategies at the firm.
While the new approach provides workers with more freedom and less time stuck in traffic, it also has some real estate experts concerned that companies could be left with a lot of empty office space if some or all of their workers don’t come back in person.
The SIOR Commercial Real Estate Index, which tracks industry activity nationwide, fell 16% in the first quarter of 2020. Lawrence Yun, senior vice president and chief economist for the National Association of Realtors, wrote that office space has been hit harder than industrial space.
“Leases will likely become more short-term, and businesses may opt for smaller office spaces so they are not faced with high rent costs if another health crisis emerges,” Yun wrote.
If workers opt to continue working from home even as the economy reopens, these impacts could linger. Investors as prominent as Warren Buffett have discussed the possibility that the virus could reshape the American office market for years to come.
Despite the challenges, however, Hanson of Dekker/Perich/Sabatini said she expects office design to evolve with the times, with more space for individual workers, more usable outdoor workspace and smaller conference rooms.
“We believe we’ve got answers that are smart, and solutions that are smart,” Hanson said.
Changing landscape
The pandemic could have the unintended consequence of loosening what has been an increasingly tight market for office space in Albuquerque.
By the second half of 2019, Albuquerque’s office vacancy rate stood at 17.2%, its lowest point since 2008, according to commercial real estate firm CBRE. Jim Chynoweth, managing director for CBRE’s Albuquerque office, said most available buildings are older and rundown, meaning that the vacancy rate for newer space is significantly lower.
“We have an abundance of space nobody wants,” he said.
Even with prices on the rise before the pandemic, Chynoweth said there was still a significant gap between the rents that Albuquerque is able to support and the cost required to build new office space without a tenant lined up. That dynamic contributed to the shortage of office space, he said.
Reilly White, an associate professor at the University of New Mexico’s Anderson School of Management, said the virus put a damper on what was shaping up to be a promising year for new office development in Albuquerque and other markets. The pandemic’s shutdowns forced companies to close and left many unable to pay rent, leaving landlords with less liquidity than usual.
As a result, White said the return on investment for office developers has dropped precipitously in the past several months, making lenders and investors more reluctant to provide financial backing for office projects.
“This is going to be a slow recovery in that market,” White said.
Brighter outlook
Many local real estate watchers say rumors of the demise of office space have been greatly overstated, particularly in markets like Albuquerque. Scott Whitefield, managing director with Colliers International’s Albuquerque office, said he expects the city’s office market to avoid the carnage expected in larger cities.
Compared to cities like New York and San Francisco, a relatively small percentage of Burqueños take public transit to work, which may make workers less reluctant to return than those who work in denser environments. Whitefield said this makes it less likely that the local office market will see a sharp rise in vacancies.
“There will be a change, we will adapt, and business will continue,” he said.
Whitefield and Rose also agreed that working from home is starting to wear thin for some employees, who miss the experience of collaborating with colleagues without a computer screen in the way.
“People miss human contact,” Rose said. “They like the sense of community that comes about in an office or a co-working space.”
Healthier future
In the short term, some companies are working to make their workers comfortable and safe as they start to reopen their offices. Rose said FatPipe has added new technology to its New Mexico facilities to help keep sick tenants from infecting others.