The Reality of Covid and Accessing Its Impact on Commercial Real Estate

The lingering impact of Covid on commercial real estate is very much at play. With a fine line between success and survival, new insights and strategies are required.

The pandemic affected every industry, business and employee in 2020, few for the better. High-rises, malls, business parks and main street stores everywhere were shuttered, closed or running on empty. The sudden and dramatic changes forced businesses, their employees and their landlords into predicaments no one had ever experienced, imagined or could ever plan for. Countless offices saw empty floors and cubicles, and many are still that way. Some businesses have disappeared, and many employees will never go back to their place of work. What’s the future of commercial real estate as we used to know it? What might the new normal look like and how will it be defined? The Commercial Real Estate team of specialists at Banc of California, answered a range of questions on the minds of developers, investors, entrepreneurs and those looking for insights and opportunities for the months ahead.

Do any traditional property strategies require a re-think because of the pandemic?

Nearly all owners have had to re-think how to operate their property in order to accommodate users be it tenants, customers, or employees. High-rise office properties, for example, in traditional downtown cores, will see changes as employers rethink the need to centralize or co-locate in smaller pods in dispersed hub locations. Meanwhile, office owners continue to make changes to afford a safer experience for tenants with “touch free” systems for doors and elevators, upgrades and improvements to HVAC systems, limitations to elevator capacities, directional flow patterns in buildings, etc.  Our expectation is there will be more spacing between employee workstations and greater flexibility to work remotely.

Have values in OC metro areas maintained throughout the last year?

I think you could say in general that values have declined in most major metropolitan areas. Orange County was not immune from Covid’s impact. Values declined for several property types, including hotels, office complexes, and multifamily (condos & apartments). It’s no surprise that the hospitality industry has been hit the hardest because many hotels rely on business and convention stays, special events and special attractions, which mostly evaporated after the 1st quarter of 2020.  There appears to be some sign of this improving through the 3rd quarter of 2021.  Higher confidence through increased vaccinations and possible “herd immunity” will help drive change, but it will be gradual.  Office values are declining but transaction volume remains light due to lack of market certainty.  The supply of new construction in recent years coupled with remote-working options has had negative impact on occupancies, rents and, therefore, property values.

What are the key opportunities and risks for developers in 2021?

Liquid, well capitalized, experienced developers always find opportunities during times of upheaval and this time period is no different.  Fortunes are made, and lost, from unexpected turns in the economy.  This will certainly be the case with Covid-19.  No one we spoke to about the pandemic expected it to last this long nor saw the depth of change in the way we interact or conduct business.  The risk today is still not knowing how long this pandemic will last and what the “new” normal will be.

Are there any real estate sectors that run the risk of becoming obsolete in the current climate?

Not obsolete but transformed, yes.  Online shopping has accelerated through the pandemic and that has meant significant challenges across the brick-and-mortar retail landscape.    Regional malls have been hit the hardest and will likely need to rethink their value proposition to customers while being creative and more efficient with land use.  The malls that are on enormous land parcels with large surface parking have opportunities for smart redevelopment.  This will of course need to be supported by cities and could potentially address the shortage of housing in many parts of Southern California.

Do REITs make as much sense today as they did five years ago?

There is still a need for REIT’s in the marketplace today given the core or essence of most REITS is to deliver steady dividend income and long term capital appreciation.  In order to do this the REIT is reviewing micro and macro trends in the market place and will deploy funds in order to achieve its basic levels of returns and estimated capital appreciation. This allows the average or unsophisticated investor the ability to leverage industry knowledge, and diversify personal risk.  This is key when diversifying a stock portfolio, in that, at the end of the day, there is physical collateral to back the investments being made into and by the REIT.

What do tenants need to be thinking about as they seek new spaces in 2021?

There are still too many unknowns about when business will return to normal and just what the “new-normal” will look like. Tenants won’t want to make any long term commitments to their space needs until there is better visibility on the health and economic fronts.  Landlords should be prepared to accommodate more short term extensions over the next few years.

As one of California’s fastest growing commercial real estate lenders, Banc of California’s seasoned team of CRE specialists can offer competitive solutions for your specific financing needs.

For more information about our tailored CRE solutions, including Term, Bridge, Construction, and Revolving loans for various asset classes, visit: www.bancofcal.com/cre

Views and opinions expressed belong solely to the members of the Commercial Real Estate team, and not to Banc of California, N.A.