Commercial Real Estate Market Struggles as Residential Sector Rebounds

While the residential real estate market is experiencing what appears to be a swift rebound from the coronavirus-induced slump, the commercial landscape still looks relatively bleak.

“Consumers have been forced to move away from buying in stores and are now doing much more shopping from home,” National Association of Realtors chief economist Lawrence Yun said in a statement. 

“Unfortunately, this has come at the detriment of commercial property owners, but these circumstances could be an opportunity for growth in the industrial warehouse market, as Americans have become more reliant on home delivery services,” Yun added. 

Yun’s observations stem from the results of a NAR survey from June 24-26 of more than 2,300 members. Only 19% of commercial property managers in the study reported that rents were being paid on time, while nearly 75% reported that they had tenants who were unable to pay or struggling to make rent. 

Of those property managers, 59% said they would try to accommodate delayed rent payment requests, depending on the circumstances; 43% said doing that would be difficult; and 19% were terminating leases due to nonpayment. 

The situation was slightly better for individual landlords: 36% reported that rents were being paid on time and 13% said they were terminating leases. 

Unsurprisingly, retail tenants account for the hardest hit sector amid stay-at-home orders and social distancing efforts. They accounted for 56% of the terminated leases or requests for rent payment extensions, according to the study. Office tenants followed with 38% of terminations and delay requests. 

The survey also showed that 83% of the NAR’s commercial members said small business owners were most concerned about taking financial hits due to a decline in customers, while 66% worried about a COVID-19 resurgence forcing another shutdown. Protecting employees and implementing social distances accounted for 61% and 59% of the biggest concerns for small businesses, respectively. 

Even as areas throughout the country begin to reopen, 44% of respondents said they expected a spike in demand for industrial properties, apparently to accommodate expanding warehouse operations for e-commerce businesses. Demand for apartment buildings and grocery stores is expected to remain stagnant. While demand for offices and retail space is anticipated to take a nosedive, according to the survey. 

While clouds remain over the commercial sector, the sun seems to be shining on the residential side of the street. That’s due, at least in part, to pent-up demand for housing. The NAR’s survey found that 27% of buyers’ agents reported that their clients were expressing more urgency about buying a home. 

Of those agents, nearly 40% said their clients urgently wanted to find a house because they’d stalled their search during the pandemic and were now readier than ever to move. In a likely related finding, respondents said 21% of their buyers realized during the pandemic how much they’d appreciate the features of a new home. Popular features include a larger space, home offices and bigger yards. 

“After being home for months on end—in a home they already wanted to leave—buyers are reminded how much their current home may lack certain desired features or amenities,” Yun noted.