Unlike the past economic challenges we faced, COVID-19 had an immediate impact on the commercial real estate industry, all across the globe.
The true immunity of CRE to the COVID-19 pandemic is about to be put on a test in a variety of ways. Each of the CRE sectors, including industrial and office commercial real estate are facing a unique set of obstacles and challenges.
As time passes, the impact COVID-19 has on business continues to unfold rapidly. Although it is still early to fully grasp the impact of pandemic, history can be a helpful source of information as we begin to stand on our feet again.
The state of CRE industry before COVID-19 outbreak
Commercial real estate was in a solid state before the outbreak. Liquidity, balance and capital availability were all healthy. Along with this, the United States CRE markets maintained an international attractiveness.
The swift impact of COVID-19 on commercial real estate
Since the middle of March, when COVID-19 was declared a pandemic, which was spreading rapidly around the globe and the US, financial markets have declined fast.
Rather than experiencing the typical lag and setbacks, the commercial real estate industry felt the consequences immediately. This was due to trade activities and occupiers businesses being shut down.
Actions by the government that impacted the CRE
The Federal Reserve and the United States government took multiple measures in response to the pandemic, some of which impacted the CRE industry greatly.
With the selling pressure on the rise and illiquidity concerns in the CMBS markets, the Fed provided short-term financing to the investors.
Alongside that, the federal government passed the CARES Act in order to boost liquidity and cash flow. This act includes several tax and business spending provisions that can be leveraged by commercial real estate companies. It also increases bonus depreciation, allows companies to obtain cash flows for carryforward of minimum cash credit and utilizes net operating losses from previous years.
How does CRE recover and thrive after this?
Compared to other pandemics, epidemics and downturns in the past century, the COVID-19 has been unique both in its global reach and reaction. Entire cities, even countries, have had shelter in place orders and/or have been completely locked down.
This sudden change in the work-life and business required mass remote working to take place, as well as lifestyle changes which created a substantial amount of fear.
These intersecting factors, which may prevail over time, will most likely only continue to influence occupiers and end-users in a never seen before ways, which is again, expected to have further implications for the commercial real estate industry.
In order to respond, recover and prosper, CRE firms must chart out their path prior to the pandemics and all the decisions that were made since.
RESPOND
This frame allows companies to deal with the current situation and manage their continuity. It may include steps like:
- Management of liquidity
- Tenant support
- Operations support
- Remote working & relying on technology
RECOVER
This frame allows companies to learn and adopt strategies that’ll help them emerge stronger. It may include steps like:
- Promoting well-being and tech usage
- Enhancing cybersecurity
- Capital management
- Liquidity management
- Reassessing asset portfolio for risk mitigation
- Business continuity
PROSPER
The phase in which companies prepare, shape and adapt to the new normal. This may include steps like:
- Reevaluating business expectations
- Identifying current threats
- Being open to new business opportunities
- Building strong relationships
Individual CRE firms’ abilities to ride out the storm will depend on their response to immediate challenges that emerged – particularly the declines in short-term cash flow and space demand, alongside the uncertainty of commercial tenants being able to pay their bills.
Like in many other problematic periods in life, acting smartly and swiftly will help with determining the fate of players, not only during these hard times, but also when the industry recovers from the crisis and recovers itself.
