The disruption created by the Pandemic is impacting the commercial real estate market in many ways and in each product category differently. Here’s what we can expect and what this means for buyers and sellers.
Expected Impact For Industries
- For industrial real estate, manufacturers may pursue sale leaseback strategies in order to release much needed capital into their companies in order to survive and to retain workers, reduce debt and to give themselves breathing room as they redefine their businesses. They will have to focus on doing business in a new “social distancing” way, needing to increase efficiency and improve profitability as they face increased costs associated with the virus. Owners have be locked at home thinking about their companies and what changes need to be made.
- Logistics providers in the sweet spot of the crisis, serving the health industry with PPE will need more efficient buildings for order fulfillment and also quick turn around from receiving to shipping. The buildings with high efficiency, high cube, ample loading and functional yards will be in high demand while class C buildings which have functional obsolescence will struggle to attract good operators and therefore will have to settle for lighter credit tenants.
- Warehouse firms with products which are non-essentials may have to deal with client bankruptcies which means they are holding the bag with goods which no longer have a market. With thin margins, these warehouse operators may not be able to hang on to recover, eventually sending more buildings to the market. The shift to tenant side or buyer side has taken place after a long bull market run.
- In the office market, companies are finding that employees are equally productive and able to work from home, so expensive office space will go by the wayside as these offices sit dormant. There will be increased sublease space coming to the market and demand for direct office leases will decline. Decreasing rents shall follow.
- Coworking environments are in major stress. There will be subleases available to minimize losses for long term lease holders realizing they can do more with less.
- Retail space will continue to struggle as new ways of buying product become habits of all of us in our “safe at home”. Strip centers and neighborhood retail centers will have to settle for lighter weight, lower credit tenants and therefore the valuation of these properties will decrease accordingly.
Opportunities In the New Reality For Industries
There is always opportunity in change, we just have to see it. Astute business owners and landlords will be looking for ways to deliver products and services or space which is relevant to the rapid changes taking place due to this health crisis. Reducing overheads, conserving cash in a recessionary period are always defensive strategies. The offensive strategies are to find new customers, change products and adapt services to what is needed the most. Every new problem requires a new solution.
Landlords who deliver space flexibly will be the winners. Currently, Apex is working on a transaction now which would not have come about prior to the pandemic. The landlord who we represent is adding labor services to a standard warehouse lease to help a client who does not want to hire his own people. We are separating a single lease into two components to satisfy office user and warehouse user because both parties are uncertain about their business in the future. The landlord is adapting to the changing needs of his customer and Apex is guiding the process as we all think outside of the box.
Expectations and Reality For Buyers and Sellers
The deal flow will be in major flux as the expectations between buyers and sellers are disparate. Some sellers are still hanging onto the bull market and strong pricing of a few months ago and have not become realistic, hoping for a quick recovery.
Buyer’s do not want to buy as prices are on the way down so they will want to wait until we hit bottom. We have been through several cycles before and the buyer’s behaviors are predictable and logical.
Sellers will adjust pricing when the pain becomes so great that they would rather sell than lose their buildings back to their lender.
How Apex Can Help
Actively understanding the market dynamics and drivers for each product type is vital in order to help navigate through the uncertain times ahead in our industry. Apex is ready to help you analyze the situation for your respective properties and then help you identify the best options based upon your objectives. We will help you move forward in changing times provide you with market feedback, and adjust our strategies until you are successful. For more information, contact our offices at 310-377-3456.
