Commercial real estate has always been an attractive industry for investors. However, COVID-19 has changed all that and is now making CRE investors think twice before investing.
Randal Gindi is a real estate investor from Brooklyn, New York, who has been closely watching the commercial real estate market over the past few months. He provides his insight into the key challenges that commercial real estate investors will face moving forward in three main sectors: retail, office, and healthcare.
COVID-19 has significantly impacted commercial real estate in the retail sector. The global pandemic has accelerated trends within the retail sector that were already becoming evident. For example, even pre-COVID, many small businesses were riddled with debt and were struggling amidst the rise of e-commerce and online shopping. These businesses were likely on the verge of closing before and now the pandemic has pushed them over the edge. The result is that many businesses in retail spaces have shut their doors permanently. Many of these have also filed for bankruptcy. Thus, when it comes to commercial real estate investing in the retail sector, Randal Gindi advises commercial real estate investors to be very cautious.
Currently, property owners are facing a multitude of challenges that are costing them a lot of money to fix. These owners are being forced into spending a considerable amount of money to find a new tenant in this unstable market or to attempt to reposition or redevelop the property just to keep their investment afloat. In the past when a retail business closed, property owners could rely on the entertainment sector to fill these vacancies. For example, movie theaters, gyms, or restaurants might have leased a property that a clothing store had previously inhabited. However, with COVID-19, the entertainment and hospitality sectors have stalled and finding a new tenant is extremely difficult.
Second, Randal Gindi says that office spaces now come with their own set of unique challenges for CRE investors. Due to COVID-19, many offices shut down completely, with entire workforces going virtual. Even now as many cities in the United States are opening back up, office use in most major cities is less than 25% of what it used to be. The good news is that despite the drop in utilization, office rent collection has remained at 95% or higher so far.
However, unlike what we saw in the retail sector, the effect of COVID-19 on offices is likely to be seen in the long term. For example, this sector will slowly decline as many businesses decide to permanently close their offices and shift to an entirely online workplace. Again, this will be a slow shift, as such a huge decision requires a considerable amount of thought on behalf of the business. Plus, office leases are often much longer than retail leases and so it will take time for existing leases to run their course.
Randal Gindi on Healthcare
The healthcare sector has been one of the most heavily impacted areas of commercial real estate. This sector includes a wide variety of properties, from hospitals to senior homes. It also includes labs and research and development facilities, two types of properties with a positive outlook thanks to the money being poured into finding a cure for COVID-19.
The outlook for doctor’s offices and senior housing is not as positive. Senior housing centers have unfortunately been where the bulk of COVID-19 deaths in America have taken place and this will undoubtedly have a negative impact in the long term. Even for those senior homes that have not been devastated by COVID-19, increased wages for staff, higher insurance costs, and increased personal protective equipment all amount to extra spending that had previously been unaccounted for and that will undermine the sector’s chances of success for CRE investors. Further, doctor’s offices are still operating, but many have switched from in-person appointments to virtual, telehealth appointments, says Randal Gindi.