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James C. Dragon

The owner of commercial real estate

What Effects Would COVID-19 Have on Commercial Real Estate?

As the coronavirus effects continues to spread around the world, numerous sectors are adapting to its effects. Among those adjusting is the commercial real estate industry.

Commercial real estate is a significant asset sector with an estimated more than $12 trillion in the United States. It consists of apartment complexes, shopping centers, workplaces, and hotels.

Commercial real estate properties are crucial for many firms and are frequently substantial investments. As these locations become vacant, they pose concerns such as building deterioration, utility failure, coverage limits, and wasted expenditures.

If the spread of COVID-19 continues and the economic situation worsens, property owners may decide to convert their assets to support new company operations. For instance, a business that has shifted to online sales may want to convert its storefront into a warehouse or distribution facility.

Repurposing buildings for new purposes can decrease the likelihood of vacancy and guarantee space utilization. It also minimizes the building's running and maintenance expenses.

But, real estate leaders must recognize that there is no one-size-fits-all response to COVID-19 for all commercial tenants and assets. Instead, they will need to be able to make decisions based on local epidemiological and economic circumstances, what is occurring around their portfolios, and the pandemic's impact on individual tenants.

The COVID-19 epidemic has significantly impacted numerous industries, including commercial real estate. People are being compelled to modify how they work, where they travel, and with whom they interact, all of which are at odds with the current need for and use of a significant number of commercial assets.

For this reason, it is vital for real estate leaders to take immediate action to ensure that their buildings and the spaces within them remain usable and profitable for their end users. This involves ensuring that their cash management procedures align with the current market climate and focusing on efficiency and digitization to improve tenant and customer experiences.

The epidemic of COVID-19 was a great shock to the commercial real estate market. In contrast to earlier economic recessions or pandemics, trade activity and occupants' companies were halted (see figure 1).

For landlords, this entails modifying the spaces they offer and negotiating terms that allow tenants the freedom to extend their leases or sublet them in the future. This will aid businesses in surviving the inevitable changes brought on by the COVID-19 epidemic and guarantee that they give the finest product possible to their end users.

The shock was instantaneous and widespread, with some property sectors enduring more significant stress than others. This has led to a deterioration in market fundamentals, including a decrease in demand, a decline in rentals, and an increase in vacancy rates.

Vacancies are a significant concern for any owner or manager of a business property, as they can reduce income potential and result in lost expenses such as mortgage and utility payments. These risks can be reduced by ensuring all homes are occupied and in good condition.

However, the severity of vacancies also relies on the type and location of commercial real estate. Office, retail, and hotel properties will likely endure the highest emptiness due to social distancing and stay-at-home commands caused by COVID-19.

Commercial real estate has always been regarded as a safe refuge during inflation. Yet, it remains to be seen how inflation will affect the sector.

Inflation is a common factor in real estate price appreciation and rent hikes. This can be advantageous for commercial real estate owners, who will benefit from the increased demand.

Inflation is also a significant element that may hinder commercial property development. This could affect a commercial real estate property owner's ability to sell for a profit.

So, commercial real estate investors must ensure they do not depend only on COVID-19's inflationary impacts. In addition to inflation, it is essential to consider the value of each asset type and CRE sector.

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