On March 11th, 2020, the World Health Organization declared a global pandemic related to the spread of the novel coronavirus. As part of this declaration, public health authorities offered several pieces of advice to stay healthy. Among the most notable points was the recommendation to avoid indoor spaces and/or large groups of people. For office workers, this meant a seemingly overnight shift to a work from home strategy.
In this article, we are going to discuss the impact of remote work on commercial real estate assets. We will describe the immediate impact, the current situation (at the time of writing) and offer some predictions for the future. By the end, readers will have the information needed to determine if a commercial real estate investment is a suitable fit for their preferences in a post-pandemic world.
At First National Realty Partners, we specialize in the purchase and management of grocery store anchored retail centers. We prefer this asset class because it has historically proven to be incredibly resistant to major disruptions – like a pandemic. To learn more about our current investment opportunities, click here.
The Shift to Remote Work
Again, the primary preventative measure to avoid the coronavirus was public health authority advice to avoid indoor spaces. For many office workers, this meant an immediate shift to working from home and utilizing modern technology to connect and collaborate with coworkers.
While working from home was initially intended to be a stopgap measure, two funny things happened. First, it became clear that the threat of the virus was not going to go away quickly. Second, it turns out that many employees really liked the flexibility of working from home. So, what once seemed like a temporary solution has started to look like a longer term shift.
40% of People Would Move to a New City if They Could Work From Home
The opportunity to work from home, or remotely from anywhere, gave workers the ability to ask themselves a very simple question, “If I don’t have to live near my job, would I still live here?” For many, the answer to this question is a resounding no.
In fact, we conducted a survey with 1,129 respondents and asked “Would you move to another city if you knew you never had to return to the office?” 40% of the responses, or 451 people, clearly said that yes, they would move to another city.
Further, in another survey, conducted by Bloomberg, 40% of the respondents said that they would rather quit their job than have to go back to an office full time. On this point, many workers appear to be following through. In July 2021 alone, four million American quit their jobs, and resignation rates have remained abnormally high every month since. These resignations appear to be highest among mid-career employees ages 30-45 and in the tech and healthcare industries.
So, if workers are willing to move if they can, and are willing to quit if they can’t, the question we are concerned with is how will this trend impact the commercial real estate investment industry?
The Future of CRE Due to Remote Work
To be clear, there is still a tremendous amount of uncertainty in the relationship between remote work and commercial real estate, but there appears to be a few trends that have some staying power.
Rural & Suburban Booms
While the initial exodus out of city centers appears to be slowing, there does appear to be some staying power in the growth of certain rural and suburban areas. The trend appears to be driven by three factors: space, affordability, and quality of life.
If individuals are going to be working from home full time, they don’t want to be cramped in a city apartment. They want dedicated workspaces in the form of home offices or spare bedrooms. In addition, if they are generally just going to be home more, they want the comforts of a larger home.
In a major city center like New York City, Los Angeles, or San Francisco, a larger home or apartment can be prohibitively expensive. As a result, remote workers have flocked to close suburbs in search of more space and dedicated work environments at a more affordable price.
Finally, months of strict social distancing measures and city shutdowns served as a reminder to many that there is more to life than a long commute to a traditional office every day. As such, many remote workers and those with hybrid work arrangements have sought out areas with high quality of life, plentiful outdoor activities, and good weather. It is no coincidence that some of the biggest coronavirus pandemic real estate “winners” are places like Florida, Texas, and Colorado.
So, if workers are flocking to suburban and rural areas, this means that these markets will need retail centers, grocery stores and apartments to support them. This is a positive for the commercial real estate industry.
Urban Centers Coming Back in Demand
The initial exodus from urban areas had a detrimental impact on two asset classes in particular, multifamily residential real estate and commercial office. As a result, rents fell fast and far and incentives/concessions offered by commercial landlords rose. The combination of falling rents and rising incentives, combined with enhanced knowledge of virus safety protocols has somewhat reversed the exodus to the suburbs.
This is also a positive for the commercial real estate market, particularly for the commercial property types that suffered the most in the early stages of the pandemic.
Flexibility is Critical
One major lesson that commercial landlords have learned in the pandemic to date is that flexibility is critical for maintaining high levels of occupancy and net operating income.
For example, traditional office space and big corporate campuses appear set to be replaced by hybrid work models, flexible work arrangements, and an array of smaller satellite offices. Or, traditional retail stores appear set to convert some of the square feet dedicated to the sales floor to shipping/fulfillment space.
Focus on Technology and Safety
To power the collaboration necessary to work remotely and to ensure that workers/shoppers/employees stay safe, there is an increased focus on safety and technology in commercial spaces. For example, physical office spaces that serve as centralized hubs need to have the technology infrastructure to connect remote workers and allow them to collaborate with colleagues in real time.
These same spaces also need to have established safety protocols to ensure that the people who do enter them are safe. This means plenty of sanitizing stations, adequate distance between work spaces or shopping aisles, enhanced air filtration systems, and a focus on air ventilation. The properties that have these features will be well positioned for the foreseeable future.
Investing Through Private Equity in the Age of Remote Work
As the post-COVID era draws nearer, commercial real estate markets remain in a state of flux. There is much uncertainty about how many key issues will play out and the results will have a material impact on returns. For individual investors, navigating this uncertainty can be challenging, particularly if it isn’t their full time job. For this reason, it can be particularly helpful for individuals to partner with a private equity firm when allocating capital.
A private equity firm is one that invests in the privately held securities of other companies, including those that own real estate. For private equity firms that invest in commercial real estate, they have a significant amount of expertise and resources that help them stay on top of the latest trends, including how the pandemic will impact the future of commercial real estate.
In our case, we believe that properties that are well positioned for the post-COVID era will have 3 things in common:
- Tenants with a resilient business model that is less prone to major disruptions. For example, we like grocery stores because demand for their product, food, is and always will be strong. This makes for stable rent payments through all phases of the economic cycle.
- Tenants who offer omnichannel sales and fulfillment options. On the sales side, they should be well represented on social channels, major distribution platforms (like Amazon or Etsy), and offer a dynamic in person shopping experience. On the fulfillment side, they should offer buy in person, buy online/pickup in store, and home shipping options.
- Tenants who provide some sort of experiential component that is difficult to replicate in an online shipping world. For example, we like quick service restaurants, boutique fitness facilities, and nail salons.
Finding these types of properties and purchasing them at a good price, on behalf of our investors, is our specialty and we continue to update our investment strategy as the market changes.
Summary & Conclusion
The coronavirus pandemic has had major political and economic ramifications, including on the commercial real estate market.
Among the most notable commercial real estate impacts is the shift to remote work, which has had negative consequences for office buildings and positive outcomes for suburban areas, co-working spaces, grocery stores, and the wellness industry in general.
As we approach the post-COVID era, properties that are well positioned for success will have tenants with resilient business models, tenants that offer an experiential component, and tenants that offer omnichannel sales and fulfillment options.
Because the market is constantly changing, it can be helpful for individual investors to partner with a private equity firm to help them navigate future uncertainty.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you would like to learn more about our commercial real estate investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.
