What Effect (If Any) Will Herd Immunity Have on Commercial Real Estate?

Commercial landlords, whether in small, medium, or large buildings, are eagerly awaiting the return to normalcy, as the loss of tenant-accrued rent and mounting accounts receivable balances continue to put a damper on financials. However, until herd immunity is reached through a combination of the natural process, or until the vaccine is fully distributed, it is unlikely those losses will be pared anytime soon.  A shift, however, is on the horizon. Some publicly traded Real Estate Investment Trusts (REITs) have certainly put on a good face amid the decline because they too realize that a shift is coming for bringing more staff back to work and increasing leasing transactions. 

The outlook is undoubtedly positive. Nonetheless, any expectations that we will soon see a return to pre-pandemic occupancies must be tempered.  Although corporations aren’t necessarily relinquishing their office space, some companies are already contemplating reducing their overall square footage on expectations that those who shifted to working from home at the start of the pandemic will continue to do so after it’s over. And, as more employers see the benefits of the work-from-home era, we are likely to see more employers offer this as a permanent option.  While the demand for work-from-home isn’t expected to be extremely high (with some managers estimating that, in a span of five years, 37.5% of workers will be fully or partly remote), the benefits to companies and employees alike still may drive a partial shift.  There is an interesting dichotomy that is developing as large corporations such as Facebook are offering permanent work-from-home as an option while still engaging in large lease transactions (such as the 730,000 sqft. lease of office space in NY). 

Overall, businesses that lease commercial space are assessing how their employees use office space and adjusting their expectations and needs based on having fewer workers in the office. Given this transition, some commercial estate investors have begun to reallocate investment capital to residential asset classes to accommodate the growing number of professionals who are choosing to work from home permanently.  Commercial real estate may be down, but it is certainly not out; and as the shift occurs from greater worker density per square foot, office space may become a great bargain for second tier and smaller companies looking to snag upscale spaces at great rates, all the while decreasing their overall footprint. This blend appears to be here to stay.

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