The U.S. and the world are facing a tremendous challenge; the scale of which is unprecedented in recent history. The spread of the novel coronavirus (COVID-19) is significantly changing all aspects of day-to-day life and impacting society, the economy and, by extension, commercial real estate.
The extent, length and severity of the COVID-19 pandemic is unknown and continues to evolve at a rapid pace, sometimes changing by the hour. We are seeing entire states and countries on lockdown, rising mortality rates, widespread layoffs and an economy that is now in recessionary territory.
Some economists are anticipating a sharp bounce back for the economy that could occur as soon as Q4 2020; others feel that it could take 12 to 18 months for the impact of the COVID-19 pandemic to fully play out.
What are the implications for office real estate? Potential impacts include the following:
- Decision making will largely be put on hold, impacting both leasing and acquisition/disposition activity.
- Short-term income streams will be impacted as some tenants, particularly those in the most beleaguered business sectors, seek relief from rental commitments.
- Variations in business sector susceptibility could also cause variations in market performance. Cities dependent on the energy sector, most notably Houston, could be among the most adversely impacted.
- Similarly, Los Angeles could be temporarily impacted by the slowdown in the entertainment industry.
- A similar negative impact could play out in markets dependent upon trade and port activity, along with those with major travel and hospitality firms central to their tenant base.
- While no business sector is immune, larger tech firms with strong balance sheets look best placed to weather the storm. This could help insulate tech-centric markets such as the San Francisco Bay Area and Seattle.
- One note of caution – a slowdown in venture capital (VC) funding could stall the growth of start-up and small to medium sized tech companies, particularly if they are already highly leveraged.
- Markets with a strong healthcare, biotech and pharmaceutical presence, such as Boston, Philadelphia and San Diego, may also be less impacted.
- A virtual cessation in office construction activity may occur. Orders are already in place to stop non-essential construction in some markets such as Boston and New York.
- The core coworking model will be challenged as clients, many of whom are on short-term agreements of as little as 30-60 days, cease to use such facilities. The greatest impact is likely to be on shared, rather than dedicated, space. Look for increased merger activity in the flexible workspace sector.
- The most lasting impact could come from firms reassessing their space needs and the flexibility of their lease agreements. If it is proven that some business functions can be run successfully through remote working, tenants may decide not to house such operations in their office space once we reach the new normal.
- Additionally, firms could move to a more distributed labor strategy, rather than locating all functions in one central office, and consider greater investment in artificial intelligence (AI) to undertake routine tasks.
A clearer picture will emerge as we move through the second quarter, which will be the initial quarter to be fully impacted by the pandemic. A key factor will be the extent to which business confidence returns in the second half of 2020 and whether this will be in the context of a new pricing climate – both in terms of rents and capital values.
Colliers will continue to track the impact of COVID-19 across economies, markets, and real estate sectors. We are providing insights to help you understand the potential impact on your business and community and recommendations on ways to minimize the impacts, where possible. Please visit our COVID-19 Knowledge Leader page for resources and the latest updates.
In addition, we will shortly be publishing our latest U.S. Office Market Outlook report which will address performance and trends in the office sector in Q4 2019 and the issues and opportunities that they present.
About the Author:
Stephen is the National Director of Office Research for Colliers International, where he focuses on analyzing office property trends, compiling Colliers’ thought leadership and delivering timely market projections to provide clients with a leading edge in our industry.