COVID-19’s Long-Term Effects on the Real Estate Industry

A New Normal

The “new normal” has become the buzz term to signify what the world we currently operate in may look like post-pandemic.

As many states continue to impose shelter-in-place and lockdown orders, many entities have continued to deal with the uncertainty of the global coronavirus pandemic (COVID-19) impact on their financial reporting and business operations.

Companies should continue to remain vigilant with their liquidity and usage of cash in such uncertain times. Many lessees, primarily those in the retail and hotel industries, have seen a decrease in their cash flows and revenues due to state shelter-in-place and lockdown orders. Residential and commercial real estate entities have felt the impact in their cash collections from their occupants. According to the IBISWorld Commercial Real Estate July 2020 US Industry report, the coronavirus pandemic will have a lasting effect on the way real estate companies handle their assets. Companies should consider a more conservative approach due to the uncertain nature of the coronavirus impact on the industry by focusing on conserving cash, managing assets and maintaining low debt ratios.

While keeping the focus on balance sheet management is essential, real estate companies should also consider what lasting effects the coronavirus will have on the real estate industry and what steps to take to stay ahead of the curve.

• Understanding the needs of lessees – As the need for social distancing emerged, many lessees have implemented work-from-home strategies, video-conferencing, and interreacting digitally with their employees, vendors, and consumers. Many companies have realized that they have been able to be productive and continue their businesses through the use of technology. As lessees start to adjust their businesses to the “new normal,” many will be looking to their landlords and reevaluating their current lease agreements to see if they align with their new needs and personal or business goals. Companies may only see the need to modify an existing lease or will see the need to enter into a completely new lease contract. The process of evaluating leases to accommodate current and prospective tenants’ needs will become critical to keeping up with the changing industry. It will also help to mitigate some of the associated risk of increased vacancies. The demand for space will continue, but it will be different based on new preferences.
• Health and Safety Improvements – As businesses start to re-open and return to their spaces, they will seek to promote the health and safety of their consumers and employees as one of their main priorities. The need for more open workspaces for in-office collaboration and multi-purpose living spaces for tenants will emerge. According to new research by the IBISWorld on the coronavirus, real estate companies should consider larger floor layouts, improving building facilities such as elevators and HVAC systems for better air quality, or simply new furniture, which assists in the new need to social-distance. Analyzing ways to keep up-to-date with current and prospective tenant needs will help foresee and plan for any future health and safety improvements.
• Technological Improvements – Improvements in this area will be beneficial for both lessors and lessees. With the increased usage of technology, many real estate companies will be able to manage their businesses and assets more efficiently. Some technology software can assist in analyzing industry trends and data. Investments in technological improvements such as property management software can assist to reduce additional overhead costs and automate some of the day-to-day business processes. Technological improvements have also shown to improve tenant and landlord relationships and will assist the landlord recognize the needs of their occupants as soon as they become apparent. Tenants will be able to communicate more effectively with their landlords and keep them updated during this time of rapid change.

There is one thing we do know about what will be happening within the real estate industry post COVID-19 – real estate companies, both residential and commercial, will be adapting and formulating strategies to keep up with the changing needs of their current and future occupants. Taking small steps now and considering future improvements will allow for companies to stay ahead of the curve and continue business during the “new normal”.

Author: Livia Zambrano, M.S. | [email protected]

References
1) Fernandez, C. (2020, April 27). Will Working from Home Remain? | IBISWorld Industry Insider. IBISWorld. https://www.ibisworld.com/industry-insider/coronavirus-insights/will-working-from-home-remain
2) IBISWorld. (2020, July). Commercial Real Estate in the US (No. NN007). Ryan Roth.