Virtually every industry in the marketplace today has been touched by the COVID-19 pandemic and resulting economic crisis. Unlike recessions and financial crises of the past, instigated by more classically economic-driven issues in a few key industries, our current economic situation is more of a black swan — unprecedented, unexpected and with widespread, dire consequences.
Like all real estate, commercial properties react to broad economic conditions. The pandemic has affected every aspect of how we live our lives, driving key economic decisions on micro and macro scales and affecting the confidence of commercial real estate investors at all levels. It’s no wonder there are so many unanswered questions and “what ifs?” in the commercial real estate market. Here are a few things to keep in mind as we navigate through market fluctuations this year.
Marketplace shift to hybrid work environments
Many companies have adapted well to pandemic-era remote offices. While there are benefits to working from home, it’s no secret that many office employees miss the team-building and productivity boosts of working in a collaborative office environment. As the marketplace settles post-pandemic, it’s difficult to predict exactly what will happen in this sector of the commercial real estate market. Adding to the mix, demand for office space will likely shift depending on industry and individual company culture. Some companies may choose to expand their offices in an effort to space employees out more generously and provide more open-air working environments. For other companies, employees may demand a hybrid model — coming into the workplace only two to three days per week and working the rest at home. To save on overhead cost and increase profitability, these companies may sell their office spaces or downsize, potentially leading to a decrease in demand. What’s more — the decisions facing corporate office leadership will look drastically different three months versus three years post-pandemic. Only time will tell how the marketplace will respond to evolving working styles.
Not all industries are impacted equally
While the office, retail and hospitality sectors of the commercial market have been hit hard during the pandemic, other industries like apartment complexes, self-storage and the medical sectors haven’t seen the same impact. When businesses in certain industries can’t operate during the pandemic, it affects their present market value. And as we approach the one-year mark of the pandemic here in the U.S., it’s challenging for investors to know when those industries can reopen to their previous operating levels. This variability leads to pricing discrepancies in the overall market, on an immediate level and in future forecasting, making it challenging to predict what lies ahead for the market value of certain properties.
The commercial market doesn’t behave like residential
While the residential real estate market has been booming since the start of the pandemic, the commercial market hasn’t seen the same gains. It’s still in flux. But the fact of the matter is that commercial property values are affected differently than residential values during an economic crisis. While residential values tend to react to more cut-and-dry supply and demand models, commercial real estate has many more moving pieces. Commercial property values are determined by net operating income (NOI), which is gross rental income and expenses, which means different businesses are all impacted in their own way depending on what industry they’re in, how many tenants they have, and their current cash flow.
What’s next? Talk to an expert
It may take months before the commercial real estate market stabilizes and investors can make confident predictions on market behavior. But that doesn’t mean that you have to sit back and wait for the pandemic to be over to make a move. At NAI Mid- Michigan, we have decades of experience in commercial real estate sales, leasing, investment, development, and more. We know what it takes to solve your toughest real estate challenges and we’re committed to helping businesses in our community succeed and thrive.
Contact us today to find out how we can help you with your commercial real estate needs. We’re NAI Mid-Michigan, your best choice for commercial real estate services.