Residual Effects of COVID Still Impacting CRE

The COVID pandemic may have changed commercial real estate forever, according to John Chang, senior vice president, national director research and advisory services, who spoke to specifics during a recent video produced by his firm, “The Lasting Impact of COVID on CRE.”

“Even though we’ve effectively left the COVID pandemic behind, the residual effects are still with us,” according to Chang.

People’s behavior, values, and lifestyles have changed, and that will continue to influence, which commercial real estate property types and locations will have sustained tailwinds, he said. And that will influence commercial real estate performance over the long term, in turn influencing investor decisions.

While many of the effects of the pandemic have been resolved – such as the overall health of the country, job losses, and household consolidation – others, such as inflation, Federal Reserve policy, and interest rates, are still working through the system.

“Many of these will play out over the next year or two, but some residual effects could take years or even decades to play out, such as the labor shortage,” Chang said.

There are about 9.6 million unfilled jobs today, about five million more than normal. This shortage of workers partially reflects the decision by many baby boomers to retire at the outset of the pandemic, Chang said, but it’s also tied to the sharp reduction of immigration to the United States during the health crisis.

From the year 2000 to 2017, net immigration to the US averaged about 950,000 people per year. In 2020, net immigration was at half that level, with 477,000 people coming to the US. And in 2021, it was just 376,000. The count revived to the 1 million range in 2022, “but it will likely take several years to backfill the labor shortage,” he said.

Chang said the commercial real estate implications of the labor shortage are vast.

“It will restrain business growth, increase labor costs, slow construction, and reinforce business practices like working from home,” he said.

Still-resolving but mostly health supply-chain issues will have profound effects on industrial properties, but it will also influence housing demand, job creation, and space demand for office and retail, according to the video.

Population migration from the urban core of major cities to the suburbs and to smaller cities is still a thing, Chang said.

“When offices shut down and people were allowed to work from home, it empowered office workers to move to the suburbs or to entirely different cities,” he said. “You can see the impact on the vacancy rates of suburban apartments relative to their urban counterparts.”

He said that trend is also visible in office vacancy rates.

Although both urban and suburban office vacancies have been on the rise, the suburbs have held up much better. Both urban and suburban retail vacancies have fully recovered.

Marriages and household formation also were affected by the pandemic.

During the health crisis, many put marriage on hold. In 2019, just over two million couples tied the knot. That fell to less than 1.7 million marriages in 2020. Then in 2021, the number of nuptials recovered back to about 2 million. Estimates place the number of marriages in 2022 in the 2.4 to 2.7 million range.

“This wave of weddings contributed to a surge in household formation that drove apartment vacancy rates down, and it also likely contributed to the rapid escalation in single-family home sales in 2021 and 2022,” Chang explained.

“On a broader scale, married couples tend to prefer suburban and smaller city lifestyles, especially if they have children. And that will perpetuate the migration trend boosted by the pandemic.”