Has commercial real estate bounced back from COVID-19?

The COVID-19 pandemic had major repercussions for the housing market — triggering a slowdown in listings, disrupting home showings, inspections and closings, and causing many prospective buyers and sellers to postpone or at least rethink matters.

But it also took a major toll on another side of the market: commercial real estate, which encompasses property zoned for business and commercial use, including office space, storefronts, and multifamily properties. While some sectors have bounced back, others continue to struggle.

“COVID really did a number on commercial real estate in a few ways,” explains Leonard Ang, CEO of iProperty Management. “First, while the trend away from brickand-mortar retail in favor of e-commerce has been going on for a while, the pandemic supercharged it — leading to more vacant storefronts. Secondly, work-from-home policies completely emptied many large office buildings, and many of those same buildings are still empty today. Also, restaurants were incredibly hard-hit by the pandemic, with many closing their doors forever and only a fraction of them coming back.”

The office sector was hit particularly hard, as more employees were forced to work from home and, three years later, don’t want to return to the office. Many companies have had to downsize their digs and are struggling to pay increasingly higher rental rates for office space.

“Employers and employees are rethinking how, where and when to do work. There is a flight to quality creating a more stark divide in office building value and utility,” notes Jason Aster, managing director at KBA Lease Services. “The value of the retail experience has continued to fluctuate. And many corporate occupiers are still working to reduce their footprint, whether that means cutting out square footage from a large, single office or completely shuttering various satellite offices.”

These concerns have trickled into the hotel sector as well.

“The hospitality sector took a huge hit in terms of occupancy and rates due to the lack of traveling caused by behavioral changes and travel restrictions during the height of the pandemic,” explains Jesse Shemesh, president of Point Acquisitions, LLC in Tampa, Florida.

The good news is that industrial real estate demand is booming, with the need for more fulfillment centers and warehouses, and lab and health care facilities plus multifamily developments are improving, too, according to Aster.

“Millennials and Gen Z continue to have both economic and convenience concerns with purchasing a single-family home, so multifamily complexes are popping up everywhere,” he adds.

Shemesh says occupancy and rents across a lot of the major commercial real estate asset classes that were seemingly affected the hardest by the coronavirus have begun to show positive signs.

“But with rising interest rates and an impending economic slowdown, the broader market stands to take a hit once again. There’s a great deal of uncertainty surrounding the future economic impact another Federal Reserve rate hike will cause to the market,” he says. “The commercial real estate market will continue to feel the effects of COVID-19 for at least the next 18 to 24 months as we look to temper inflation as a result of the policies enacted during the pandemic.”

Ang says the lingering problem of empty office space will need to be addressed.

“Look for property owners to get creative, such as signing nontraditional tenants for the spaces, including schools and day care facilities,” Ang says.

Kunal Sawhney, CEO of Kalkine Group, points out that the commercial real estate market reflects the health of the overall American economy and our financial well-being.

“Price growth in such properties indicates that the economy is robust, with growth emanating from increased demand of shops, offices, industrial and other spaces,” he says.

Alex Byder, the owner of BD Home Holdings, LLC, a real estate investment company, agrees.

“Also, note that owners of commercial real estate are often massive investment funds that control pensions, 401(k)s and other economic vehicles,” he cautions. “If these funds suffer, it could indirectly hurt people’s retirement savings — even if they don’t directly invest in commercial real estate.”