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CRE Opinion

Understanding the “New Market” in Commercial Real Estate

Stream Realty's Blake Kendrick on trends that may lead to long-term changes or shifts within our normal course of everyday business.

As we approach the end of April 2020, I don’t think anyone would have suspected that in just 45 short days, we would erase the majority of the strides that we had made as an economy over the past ten years.

Over the past 45 days, we’ve watched the stock market fall significantly, multiple rounds of government stimulus be approved and distributed, unemployment skyrocket, face masks become a permanent part of our everyday attire, and oil fall to a negative number for the first time in history—all the while, Americans have sheltered-in-place with minimal interaction with society.

The only thing that has surprised me more than the happenings mentioned above is the speed in which they happened! I vividly remember the 2008 financial crisis, and as I recall, it transpired at a snail’s pace compared to what we all have recently witnessed. These facts have spurred us all to think about the impacts, both short- and long-term, to the Commercial Real Estate (CRE) markets and our day-to-day business in general.

I’d like to speak to several trends we see in the office and industrial CRE sectors that may lead to long-term changes or shifts within our normal course of everyday business.

Differing Expectations

The delta between tenant and landlord expectations are at an all-time high. Tenants are feeling the impact of the current economy as they see their revenues fall on a daily and weekly basis, while Landlord’s have only had one rental payment due during this entire shelter-in-place order.

Tenants in the process of relocating or renewing are expecting to see value options and major economic changes to terms, but the fact is, the real estate market just does not change or shift that quickly.

Comparables are not materially changing on a daily or weekly basis as we are too early in this scenario, by months not weeks, to understand the true impacts, if any, to vacancy rates and lease comps.

Rental Relief Requests
Blake Kendrick

Rental relief requests started in early March and have ramped up through mid-April in all sectors of commercial real estate.

Through many discussions with landlords, and tracking Stream’s current portfolio closely, it seems that between 15 to 22 percent of industrial tenants have requested rental relief in some form or fashion while we are seeing approximately 9 to 15 percent of office tenants making the request. These percentages are based on tenant count within a specific portfolio.

However, there is a different trend between the type of space these requests are coming in for.

On the industrial side, the requests are pretty evenly spread across the board in terms of tenant size and building class while on the office side, we are seeing many more requests from smaller square footage tenants and tenants who occupy Class B office space.  Class A and Class AA space have not realized near as many relief requests to date.

The Virtual Tour

In short order, everyone is pivoting to create innovative ways to provide virtual tours for office and industrial properties.

This has proven to be an effective practice to showcase properties and vacancies during the shelter-in-place orders. Although tour activity, including virtual tours, has decreased significantly over the past 45 days, this idea will likely outlast the COVID 19 pandemic.

Due to the potential decrease in non-essential business travel in the foreseeable future, we predict that virtual tours will likely be a part of our business moving forward and might replace an initial trip to Dallas-Fort Worth to tour and evaluate a property for many companies.

This shift would decrease the need for travel, travel-related expenses, and time away from the office for companies on the front end of a transaction. This would also allow companies to create an educated shortlist of options before any required travel, or gathering, to physically walk through the shortlist of properties.

Space Planning/Layouts

Space planning and layouts have become a hot topic over the last several weeks.

Numerous questions have surfaced regarding how our daily office experience will change once the shelter-in-place order is lifted.

We’ve heard a wide range of thoughts and ideas, and my conclusion is that no one knows how the new office experience will evolve. I do think it will look vastly different in the short-term, and gradually different even in the long-term. There are several short-term considerations worth discussing:

  • Reducing the density within an office space by splitting the workforce and having mandatory work from home days to create redundancy within the workforce and decrease the risk of exposure to any virus in the future.
  • Designing the 6’ office experience where social distancing is practiced from your desk area to designated travel directions throughout the office. Benching and hoteling options are likely dead for the foreseeable future.

When contemplating each of these ideas, one tends to think about the changes they may drive within the real estate.

Will the 6’ office require more square footage per employee?

Will this reduce the value and importance of amenities within the workplace while Tenants want a significant reduction in “collision” zones?

Depending on the answers to these questions, we could see a lot of changes to how real estate is designed and operated moving forward. All these options are worth considering and spending time monitoring carefully.

There are a lot of opinions out there right now on how sectors of commercial real estate may change due to COVID-19.

It will be fascinating to look back and see what the significant factors were that changed the industry. It is still too early to know for sure what those changes are going to be or how long they will last, but I think it is safe to say that there will indeed be changes within the CRE industry and the way we approach our daily business.

Blake Kendrick serves as managing partner of Stream Realty Partners’ Dallas-Fort Worth office.

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