Although no one can predict with any degree of certainty as to exactly when commercial real estate (“CRE”) markets will return to the boom times enjoyed prior to and right up to the onset of the pandemic, one can rest assured that CRE, as an asset class, will make a swift recovery. In any event, CRE developers and owners would be wise to (i) analyze which markets will be the first to heat up as the pandemic wanes, and (ii) identify key CRE trends that will shape the industry in 2021 and beyond.
It is no secret that vacant office and retail spaces have become commonplace throughout the U.S. over the past year. In major market areas, however, CRE investors have started to view these vacancies as an opportunity to purchase commercial properties at bargain prices. As big box stores are becoming more difficult to fill, many CRE owners are looking to repurpose and convert their spaces into spaces that will be filled by their clients. For some investors, online business owners have begun to lease more space as the U.S. has experienced a tremendous decline in the availability of raw materials that many online retailers require to manufacture their products. In response, many online store businesses have begun to lease fulfillment centers and have started manufacturing their products themselves. Online retailers are now buying up industrial and warehouse space and converting these spaces into their stock room and centralized distribution centers. Some developers have caught wind of this shift and have adapted by repurposing old retail centers into industrial and warehouse spaces. In addition, according to CBRE research, for every $1 billion increment in e-commerce spent, an additional 1.25 million square feet of warehouse space is needed.[1] Accordingly, the study reported that there will be an estimated 250 million square feet of warehouse space absorbed in 2021, which is nearly twenty percent greater than recent years. Warehouse space continues to boom around the country in this early stage of the post-COVID era and shows no signs of slowing down any time soon.
Developers have begun to adapt to this changing environment. Due to technology, e-commerce, and changed spending habits, investors are looking into repurposing CRE assets in order to fit their clients’ needs. Multifamily markets have remained strong throughout the pandemic and many developers have started to repurpose old office units into residential units. Michael McMahon, executive vice president of portfolio management at RXR Realty in New York City, elaborated on this forward thinking by stating, “I think we will see outdated, obsolete assets being repurposed, for instance, some of the older Class B office buildings might be ripe for conversion to residential — particularly if that residential includes a rent-stabilized component, as the recently passed NYC Climate Mobilization Act includes an exemption for buildings with rent-stabilized units.”[2]
Studies show that a majority of people strongly believe that CRE valuations in large population centers will come roaring back within the next three to five years.[3] Although many residents of dense cities have moved to the suburbs over the past year, history has proven that U.S. cities are resilient and a return to urban offices and apartments, driven by younger workers in particular, will likely increase for the remainder of 2021 and beyond. To the extent that urban retail and shopping malls will experience continued challenges as the volume of e-commerce transactions has exploded during the pandemic, cities may benefit from rezoning these properties into other allowable uses.
The pandemic has accelerated the need for developers and investors to adapt to the changing environment of the CRE industry and although adaptation is a must, the future of CRE remains bright. The attorneys in DarrowEverett’s real estate practice group are available to assist real estate developers and investors in navigating complexities and others caused by the pandemic with respect to the purchase, sale, financing, repurposing and leasing of real estate assets around the country.
[2]https://commercialobserver.com/2020/10/adaptive-reuse-is-the-future-of-commercial-real-estate/
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