After more than two months at a standstill, the economy is starting to reopen. The next phase will no doubt come with a new set of questions. Demand remains the biggest unknown for property owners and business owners alike, and while many forecasters are predicting the pandemic will be debilitating for an extended time, early activity could say otherwise.
While data is trickling in on how people will interact post stay-at-home orders, a poll released in early May by The Washington Post and the University of Maryland, showed that 61% of Americans believe that the worst of the outbreak is either behind them or happening now.
Re-entry into shared spaces will evolve distinctly in each asset class. While most predictions expect demand to return slowly with a whimper, here are some ways the market could return with a roar.
Stay-at-home orders and mandated store closures have distressed the retail sector in the near-term. Brick-and-mortar sales are down 8.7%, the largest decline in nearly two decades, but it isn’t all bad news. Grocery store sales are up more than 25%, and consumers have been willing to wait long to enter stores safely. Grocery sales provide an example of how demand could surge once protective measures are entirely lifted, and they illustrate consumers’ flexibility and willingness to adapt to a new normal. In the interim, retail shopping will continue to shift to the digital marketplace, but surging e-commerce sales only underscore the indication that retail demand hasn’t disappeared.
In the pre-pandemic world, open floor plans, hoteling, and co-working had become ubiquitous in the office market. The post-pandemic world is going to change as people prefer separation and have learned the art of working from home. Erick Schmidt, former Google CEO, predicts higher demand in office space. Partially driven by office workers’ ability to participate in office teams without having to live, commute, or travel into heavily populated urban areas. Office spaces closer to home that are able to offer hygienic temporary spaces with the right social distancing policies could meet the pent-up demand for office workers in need of a place to focus, hop on a team call, or simply get out of the house.
Co-working, which relies on density and communal space, is expected to see a dramatic decline in demand; however, in some locations, there is a story for co-working demand to rebound.
If office occupiers adapt to telecommuting long-term, the flexible short-term nature of co-working leases could become hubs for small companies to meet in person as they eschew direct office leasing, particularly for regional offices. On the other hand, larger companies could drive the adoption of expanding traditional floor plates to provide more individual spaces for employees.
There is no doubt that the pandemic has accelerated online shopping trends. E-commerce retail spending has increased by 30% since the middle of March, representing more than a 50% increase in market growth. The pandemic has converted many brick-and-mortar-only shoppers into online buyers. While there are currently fulfillment issues due to stay-at-home measures, industrial is the long-term beneficiary of this economic event, and it is already proving to be resilient. Furthermore, weakening links in the global supply chain is prompting greater need to diversify supply chain redundancies with domestic supplies. Some manufactures will seek to shore up their supply chains by onshoring a portion of their production back to the U.S.
The pandemic has tempered demand across asset classes. As we recover and find a new normal, demand will start to return. As more Americans believe that the pandemic peak is behind us, fear of public space will begin to wane. Until then, these are actions you can take now:
- Build flexibility into your business model. Demand may return sporadically in surges followed by dry spells.
- Recognize tenant and employee needs to support re-entry into shared spaces.
- Changing commercial real estate uses will create unique opportunities.
Kidder Mathews is here with expert on-the-ground advice to help guide you through the impacts to your specific needs. Locate a specialist near you.
Director of Research