A View of Commercial Sectors Through the Coronavirus Lens

What the Future May Bring

On average, survey respondents expect commercial market transactions to decrease in the next 12 months. Recovery in the next 12 months will depend on when the shelter-in-place directives are lifted and how many social distancing measures remain. The long-term effect on commercial markets will depend on factors such as the severity of the impact on businesses and changes businesses make to prepare financially for another health crisis.

Demand For Some Sectors Strong

Two commercial real estate sectors will see strong demand and rent growth: multifamily and industrial. Certainly, the multifamily market is feeling the effects of job loss brought on by COVID-19 precautions, as laid-off workers in industries such as food service, housekeeping, and personal care are more likely to be renters than workers in other occupations.
But renters still need homes, and the large but temporary loss of jobs will slow the plans of some who are trying to put aside money for a down payment on a home. As a result of this factor and changing demographics, demand for multifamily properties, especially class B and C, will likely increase, along with rents, in the next 12 months.

Waning Demand for Retail, Office

By contrast, the market for retail and office properties is likely to soften over the next 12 months. Retail sales nearly halted during the stay-at-home period as more than 47,000 retailers across the U.S. temporarily shut their doors or reduced store hours and traffic to help slow the spread of the coronavirus. This disruption could lead to a permanent shuttering of stores more severe than in 2019, when 9,350 big retailers closed. Retail operations and foot traffic in retail stores and malls could normalize, but progress could also be sluggish as shoppers avoid crowded, enclosed spaces.
Federal government and Federal Reserve measures to contain the economic fallout and keep businesses afloat will help office properties retain current tenants. However, some businesses may shutter permanently, especially those that haven’t had the resources in place to qualify for Paycheck Protection Program loans or Economic Injury Disaster Loans.
Businesses will also likely delay hiring employees because of the uncertainty of a resurgence of the coronavirus before a vaccine is developed. Leases will likely become shorter term, and businesses may opt for smaller office spaces because they don’t want to carry the rent burden if another pandemic strikes.

GDP Recovery Uncertain

NAR’s Chief Economist Lawrence Yun expects second-quarter GDP growth to be the steepest decline in U.S. history—likely more than a 15% contraction on an annualized basis. The recovery in the second half of the year will be critical and will depend on the economy’s response to the stimulus measures and the path of virus containment.