Commercial real estate (CRE) is an investment. And like most other long term investments, CRE investors will experience exuberant heights and terrifying lows over a long enough time. The plunging economy brought about by the COVID-19 pandemic, coupled with civil unrest and political concerns of a historic election year in the US, is an example of one such valley.
But all is not lost.
While closing businesses and reducing tenancy is a hard strike against our bottom lines and limits our cash on hand, it offers unique opportunities for cheap growth for savvy investors. Opportunities might manifest as extremely affordable property available on the commercial real estate market. Or, this might be an ideal time to make building upgrades and increase the value of your CRE, as contractors are bidding quite competitively for your business.
Today, we’ll explain how the invisible hand of the market affects commercial real estate values, with a particular look at our local market in Jackson, MS. We’ll start with a light review of how COVID-19 affected business overall. We know it’s still fresh in your mind, so we won’t bore you with repeat information. Instead, we’ll focus on the most significant changes and some noteworthy details.
How Quickly COVID-19 Hammered Businesses Around the Globe
In December 2019, scientists identified an outbreak of a new strain of coronavirus in Wuhan, Hubei, China.
- It rapidly grew from regional outbreak to epidemic, and was recognized as a pandemic by the World Health Organization (WHO) in March 2020.
- The pandemic led to socioeconomic disruption on a global scale, as infection numbers and deaths ballooned.
- Drastic action was taken to suppress the outbreak.
- Here in the US, many states issued shutdown orders, social distancing requirements, quarantines, and isolation.
It was this forced shutdown that struck our economy hardest. And while it’s difficult to qualify (annual reports aren’t available yet), it seems like the most significant downturn for commercial real estate occurred during the summer. This makes sense, as an estimated 20 million Americans had lost their jobs by April, per BusinessInsider.com. Only a month had passed since COVID-19 had been declared a pandemic.
By summer, many CRE investors were feeling the slump. Ron Derven of The Commercial Real Estate Development Association (NAIOP) said “The pandemic directly impacts the demand for space through quarantines, social distancing, shutdowns, supply chain disruptions, employment loss and a shattering of consumer confidence…”
Industries Hit Hard by COVID-19
The industries hit hardest in the US were:
- Travel, hospitality and leisure
- Personal care services, like salons and spas
- Full-service restaurants
And many other sectors felt the impact negatively — ranging from dentists to movie theaters.
However, a few industries were able to capitalize on the pandemic. Warehousing, logistics and transportation companies did well, and online retailers continue to make a killing. Online entertainment, forums, social media, and games have experienced tremendous leaps in business since the pandemic began — to the tune of a 71% increase in online ordering.
So, while commercial real estate for day spas and restaurants sits unused, warehouse space and manufacturing operations are booming.
Now that we’ve cycled through the highs and lows, let’s take a closer look at the invisible hand — and how it’s affecting commercial real estate prices in a post-COVID world.
The Invisible Hand of the Market
Investopedia.com says it well: “The invisible hand is a metaphor for the unseen forces that move the free market economy. Through individual self-interest and freedom of production [and] consumption, the best interest of society, as a whole, are fulfilled.”
“Seeing” the Invisible Hand
The invisible hand manifests as price changes that affect consumer behavior. When gas prices soar, commuters buy fuel-sipping vehicles, limit their driving, and combine trips to save gas. Suddenly bicycle sales increase and traffic is less congested.
Or, let’s imagine your favorite brand of coffee is on sale. You might be motivated to stock up your supply. If the price of your favorite coffee increases drastically, you will eventually face a point where you feel forced to say “that’s too expensive” and buy another brand. So we can feel the invisible hand at work when a product becomes too expensive or when we pay more for a product that we perceive to be better.
The Invisible Hand at Work in Commercial Real Estate
In the realms of commercial real estate during an ordinary year, we can imagine the invisible hand affecting prospective tenants’ choices as they:
- Negotiate price per square foot of office space for rent
- Rush to accept “first month free” deals, or move-in specials
- Move from one commercial location to another for the sake of upscale appearance or branding
We can also imagine commercial real estate owners hoping to lure a better grade of tenant or higher rents during a typical year. They might look into landscaping improvements, a security service, a fresh coat of paint or new architectural elements. Any time you’re adding perceived value to a commercial property to attract business, you’re attempting to sway that invisible hand.
Looking Ahead: How a Changed Economy Affects the Commercial Real Estate Market
Here in Jackson, salons, restaurants and retail boutiques have shuttered since the pandemic. Once-coveted restaurant space is now overabundant. However, when social restrictions and shutdown orders finally lift for good, there will be a leasing rush as newly unemployed individuals become entrepreneurs in the food industry.
Online retailing, on the other hand, has blown up! It won’t stay that way forever, though. After the 2020 holiday shopping rush, we suspect a significant slump in online sales. We believe that the American consumer will finally have had enough come 2021.
Here are a few more post-COVID CRE notes you should know:
- Warehousing space is at a premium. So are small office spaces and shared office space.
- Major employers who pay a homebound workforce are pleasantly surprised by their lower overhead costs. They will be looking for more shared office space opportunities than large office spaces.
- We can expect to see a reduced market for massive conference rooms in the wake of social distancing. It might be time to split up large meeting rooms into smaller, socially distant, individually affordable offices for now.
Is Commercial Real Estate a Good Investment After COVID-19?
Just know that every investment comes with a certain amount of risk. Commercial real estate is so attractive because it has a history as a steady earner and insurable against many loss types.
We know that 2020 has been an unprecedented year in the world of CRE, but there’s still more to come. The Speed Commercial Real Estate staff would encourage you to take advantage of cheap commercial property prices and eager contractors to build your CRE empire. Get in touch if you’d like to learn more about commercial real estate in Jackson, MS, as an investment for your future.
Related Reading & Resources: