Commercial Real Estate is Taking a Beating, but there’s a way out for REIT’s going into 2021

As we look for commercial real estate indicators going into 2021, and signs of what will happen in the commercial real estate industry, one indicator is the performance of real estate investment trusts (REITs).

Although there has been recovery in the public equity markets, REIT’s have lagged. More investors are looking at future earnings and discounting it heavily because of the ongoing changes across industry verticals.

An example is sublease vacancies. The only reason vacancy rates are not climbing higher os the long leases that many companies have. However, as office spaces continue to sit empty due to remote work and lockdowns, many companies are subletting their empty spaces. To whom…we don’t know since everybody is bearing the burden of the pandemic.

Pension funds on the other hand are more optimistic because they are generally flush with capital and can ride out short term storms.

EMPTY OFFICES IN A TENANTS MARKET

A lot of office space is owned by institutional investors, especially Class A buildings which are typically occupied by larger blue chip companies. 

There will still be demand for office space with updated amenities. These types of projects are attractive to REIT’s and pension funds with the capital to develop these desired properties. The large inventory of downtown buildings gives them many choices as many locations are currently up for grabs. We will see an acquisition spree over the next 12 months. 

Smaller offices on the other hand are likely going to be in trouble. Low tenancy, falling valuation and asset values has been rapid, and will continue. Downtown locations will continue to shrink as Class B and C will continue to take a major hit. The major question here is “Who will return to work, and how many”? Reconfiguration considerations now mean more space per employee, and more regulatory compliance requirements. This translates to increased costs per square foot in a tenants market.

RETAIL AND REPURPOSING

Retail was already in trouble long before COVID-19. As malls emptied out and retailers consolidated operations while reducing physical footprint, the pandemic was the death blow. 

Some developers with a long term view will redevelop old retail sites, including residential, retail and service, creating a live-work space and microwarehouses. This predated COVID, and will continue. Most retail spaces will be repurposed to micro-distribution centers, which helps retailers compete against the likes of Amazon and Walmart. 

Conclusively, as an agency, you should always keep up to date with these trends as you work your deal pipeline for 2021. Remember, you don’t need all the details, just the points that matter as discussed above. Relotis CRM is always here to help you unclog your sales pipeline!

Cheers!