How Commercial Real Estate is shaping up and way forward

GDPs across the globe have fallen by double digits quarter on quarter. The pandemic has had a widespread impact across sectors of the US economy. Additionally, the consequential government action has led to severe suffering across the economy.

During 2008, when the financial crisis hit the Commercial Real Estate industry, both tenants and landlords were already struggling with weak balance sheets. The economic position for the players was much better at the beginning of the pandemic year. Historically, the Real Estate industry is used to seeing a decline in a phased manner, thereby giving it time to plan and make a hasty comeback. Things are different this time. The pandemic witnessed Commercial Real Estate take a steep pitfall. This happened primarily because the pandemic forced businesses to shut shop almost immediately and the Real Estate players saw the ripple effect in the shortest of times. The FTSE Nareit US Real Estate Index in April, 2020 saw a year on year fall of about 49% in Retail and 52% in Hotel segments. The Real Estate broker community felt the heat when several purchases were delayed in the same month and they continue to do so. Developer projects also witnessed a decline in cash flows which led to hampered development activity.

At present uncertainty continues to loom over tenant businesses. Reduced working hours and remote work brought about an economic and social impact on the lives of workers. Businesses have no option but to follow Public Health guidelines. There are affecting their top and bottom lines in the worst of ways. In a knee-jerk response, almost all local business establishments were closed across the US, barring groceries, pharmacies, and other essential businesses.

As businesses remain closed with no certain cashflows, they find it hard to pay for their rental obligations. Several small businesses have given up and filed for bankruptcy. However, this action still does not provide them with immunity against evictions.

Landlords have their own set of problems affecting their cashflows. With their tenants not being able to conduct their business, the possibility of recovering rentals is affected. Landlords who pay installments to Financial Institutions for their commercial mortgages are forced to think of harsh measures to recover rentals.

The rampant lockdowns taking place across the states have induced fear in the population as people continue to work from home or get reduced working hours. Commercial Real Estate too has had its share of bad omens. The end users have either delayed or completely put off any future expansions.

McDonald’s closed nearly 200 restaurant locations out of its 14,000 locations in the US. Of these, nearly 100 locations were within Walmart premises. Pizza Hut closed nearly 300 locations owned by its franchisee NPC International.

Starbucks too announced its own list of about 400 locations being shut down by 2021 and shifting focus towards pickup locations. Burger King already closed 100 locations in 2019 based on several reasons, and 2020 is going to give out a bigger number.

A crisis always provides us with something to learn and leaves us smarter than before. Lower interest rates are one of the biggest stimuli for the industry to make a comeback. Landlords can continue expansions by borrowing at low rates. Tenants can make suitable investments in their businesses to quickly bring about changes and get back on track faster with cheaper credit.

Those who made good money on the stock market can now route their investments into buying properties or businesses that would be out of reach before 2020.