If your business relies on people sharing space in any way, these are uncertain times. The onset of the COVID-19 pandemic immediately affected communal spaces like theaters, restaurants, and bars. But as the virus continues to spread through the community and companies extend the amount of time their employees are working from home, what will the ripple effect be on other major sectors of the economy, such as commercial real estate?
That was the subject of Downtown Dallas Inc.’s continuing “State of Downtown” series this morning. DDI’s President and CEO Kourtny Garrett spoke with Sara Terry, senior vice president at Stream Realty Partners, and their conversation offered a glimpse into how real estate investors are anticipating the short- and long-range impacts of the pandemic on the commercial real estate sector.
The implications for the broader city economy are tremendous. A drop in commercial real estate value, a move toward more permanent remote working environments, and the continued closure of bars and restaurants will undo decades of efforts to build up the health and vitality of Dallas’ central core. Just as the collapse of the real estate economy after the S&L crisis in the late-1980s shaped this city for a generation, a major commercial real estate recession could lead to a plummeting tax base, stagnation in urban reinvestment and revitalization, an incapacity to provide basic city services and maintenance, and an uncertain future for Dallas as an urban center.
The good news from this morning’s conversation is that long-range projects continue to move ahead. DDI’s Garrett said that there is $4 billion in development underway downtown, new parks remain in the works, and the district’s first elementary school will still open this September, albeit remotely. Residential occupancy remains at over 90 percent. There has also been an unexpected bump in regional and local leisure travel—all those summer “staycations,” Garrett said.
Terry said that employees are also beginning to return to the office. When Stream, which leases marquee downtown Dallas properties like the Trammell Crow Center, Chase Tower, and Comerica Bank Tower, started tracking their tenants’ occupancies at the beginning of the summer, about 10 percent of their tenants were working in the office. That has bumped up to 20 to 25 percent, with returning workers mostly employed by smaller and mid-sized companies.
It is the larger businesses that are having the most trouble adjusting to the post-pandemic world. For one, Terry said, in recent years many larger employers have moved toward more shared and open-space office environments, and it is difficult to adapt those spaces for social distancing and health safety guidelines. There are also liability concerns for large companies that could bring workers back to the office, only to see an outbreak.
Still, Terry expects downtown’s buildings to begin to refill as the school year restarts. There are some variables, however, that weren’t brought up in the conversation that could affect how employees return to the office. The first is whether some districts continue to push back the start of in-person schooling. The other unknown is whether in-person school—or increased building occupancies—will lead to new waves of the virus followed by extended lockdowns.
That has all made predicting the three- to six-month outlook for commercial real estate more difficult than the three- to six-year outlook. Terry said many investors are confident that the pandemic impacts on their business will be relatively short term and the market will rebound, even if there is some disagreement as to when. That explains why developers with large-scale projects in the works downtown—like Mike Hoque, who is building a “smart district” south of City Hall, and Ray Washburne, who controls the former Dallas Morning News headquarters—remain bullish about their long-term prospects.
In the more immediate term, Terry believes downtown may be better positioned than other sectors of the local market. It remains relatively affordable compared to Uptown, which makes it competitive in a leasing environment that has tenants looking for more space to better accommodate distancing and floor layouts that are less open plan. And while there was an abrupt drop in tenant demand at the beginning of the pandemic, potential leasers are reemerging, and property owners are becoming more adept at luring them in with virtual tours and Zoom-bound deal closings. That roller coaster of demand hasn’t prompted a decrease in quoted rental rates for downtown, Terry said, though landlords are becoming more aggressive with concessions.
“It feels like there is a lot of hopefulness coming from the tenant and tenant-rep community,” she said.
One unforeseen long-range impact of the pandemic, however, may relate to operating expenses. Property owners are spending more money on sanitizing spaces and upgrading their HVAC filtration systems. That is a new expense that may simply become a cost of doing business.
“I think back to 9/11,” Terry said. “Security used to be considered a controllable expense. It became a permanent part of operating expenses.”
In other words, the one thing we do know is that we are entering a new world, which only makes it more difficult to predict the future.