The impact of the COVID-19 pandemic has been felt throughout the economy, but maybe not in all the ways one would expect.
According to Ron Derven of NAIOP’s Development Magazine, “The COVID-19 pandemic is having a greater impact on commercial real estate than the global financial crisis of earlier in this century. That was a credit and liquidity crisis. The pandemic directly impacts the demand for space…”
As most Americans struggle to keep their jobs and pay their mortgages, commercial real estate investors with cash on hand are actually finding opportunities en masse. For this reason, there is no greater time than NOW to look for strategic opportunities to place investments for when the economy returns to full health! If you are a seasoned investor or are looking to invest for the first time, follow these tips on how you can best take advantage of the current state of the commercial real estate market…
Focus on the Long Game
With the current state of the economy, you’re unlikely to benefit from fast deals. On the other hand, making strategic, long-term investments are more likely to pay off.
Since the upturn of the economy widely depends on the country’s ability to provide and distribute a vaccine for COVID-19, it’s very difficult to predict how quickly things will pick back up. In addition, since so many small businesses were left out of the first round of the CARES Act, it’s hard to say how long retail spaces and office buildings will remain vacant. This is especially important to note as individuals continue to pivot to find COVID-friendly employment solutions, such as developing businesses that work from home.
For example, it’s important to note that the work-from-home trend is not likely to be permanent; and thus, office buildings will eventually be full once more. As more and more workers develop Zoom fatigue and begin to crave professional/social interaction again, movement back into office buildings and even retail stores will pick up — however, offices will need to evolve with the times. Long gone are the days of tiny cubicles and cramped conference rooms! In order to compete, office space will need to become more open and flexible, which leads us to our next tip…
Take Advantage of Vacancies to Renovate and Upgrade for Higher Rent Rolls
If you have cash reserves on hand, consider investing them into the future of your CRE. Although we’re likely to see vacancies increase in the short term, things will eventually pick back up. That is why, if your building is in need of repairs or renovations, now is the time!
Especially for investors that hold office space properties, it’s important to consider renovations now more than ever.
Maria Sicola, a founding partner of CityStream Solutions, a consulting firm, says this:
“The open-office plan concept, as we know it today, will be a trend of the past. Issues with noise, inability to concentrate and numerous distractions were already creating issues with productivity. Square footage per employee was shrinking to levels that, in some cases, were precariously close to violating codes. The move toward efficiency and lowering costs — while still important to the corporate bottom line — will now give way to flexibility, resilience, employee satisfaction and productivity.”
As demand for newer-concept office spaces eventually begins to build again, commercial office buildings with these upgrades will become the most valuable. For this reason, identifying possible investment opportunities in Class B or Class C office buildings that can be remodeled with newer workspace concepts is a solid move for the mid- to long-game.
Consider Repurposing Your Property Type
In addition to considering renovations for commercial buildings, there is another huge opportunity that you should also consider: repurposing property types. This out-of-the-box thinking could potentially turn your investment from coal into gold! For example:
Let’s say your small strip mall has turned into a ghost town. The retail businesses that once occupied the building have backed out due to COVID-19, and you lack a powerful anchor, like a grocery store. Instead of sitting on the property and waiting for the economy to empower retail once more, consider repurposing the property into multifamily housing or a mixed-use property! Most retail centers meet the requirements for multifamily housing since they already include parking and plumbing – so why not just build them up and cash in on a property type that has a more stable immediate future?
Another property type that is facing major challenges in the COVID economy is the hospitality/hotel property. Due to its features, including multiple rooms, wheelchair accessibility, and amenities, there is a huge opportunity to repurpose this property type into another special-use property, such as senior housing.
Although the repurposing of property isn’t usually an investor’s first instinct when facing challenges, with this economy’s uncertain future, a pivot might truly pay off! During this time, it’s important to think outside the box and identify creative strategic opportunities, like these and like those in our next tip about discovering housing trends…
Identify New Opportunities in Up-and-Coming Communities
Downtown and even suburban areas that were experiencing revitalization before the pandemic are likely to be under pressure in the current state of the economy. If there is reason to believe that progress in these communities will continue once more, then it might be a good time to snatch up these commercial properties that are in peril and hold onto them for a large return in the future.
In addition, taking a closer look at infrastructure improvements and expansion can be a precursor to a new up-and-coming community. Given that more and more people are leaving large cities to work remotely, they’ll be looking to settle into more affordable suburban areas. For this reason, identifying new highway exits and main roads can help point you in the direction of smart commercial real estate investments to make, which includes investing in our next topic: land.
Invest in Land
Purchasing land, as a long-term investment strategy, is a great move to make in the market’s current state. When the economy picks back up, you can decide to either sell or develop the land, which will help you come out profitable in either circumstance.
In addition to larger plots of land, you may also want to consider smaller parcels in downtown and suburban areas that were experiencing a revival before the pandemic. As the economy begins to recover and development picks back up, these parcels have the potential to deliver a considerable profit if they are necessary to a commercial building or city center’s expansion.
Invest in Growing E-Commerce with Industrial Properties
It used to be that office and retail buildings were considered more attractive than industrial properties – but the pandemic has changed that belief. As people move out of offices and into their work-from-home offices, and as many small businesses shut down from a lack of CARES Act funding, industrial production rages on.
In fact, throughout the pandemic, interest in industrial properties has continued to increase – and it is showing no signs of slowing down. This is because consumers haven’t stopping buying goods, but rather, they have changed how they buy goods. With e-commerce booming, production is expected to ramp up, and more industrial space will be needed.
Even beyond the pandemic, industrial properties are expected to increase in value. As the U.S. continues to repair its trade wars overseas, more and more companies will move to create full production here in the states. That is another reason why now, more than ever, is the golden time to invest in industrial commercial real estate.
Similar to a mutual fund, REITs (Real Estate Investment Trusts) fund, own, and even operate portfolios of commercial real estate. These portfolios behave similarly to stocks, and thus allow investors like you to invest and earn dividends without having to fund, own, or operate the properties yourself. REITs are known for offering strong, steady annual dividends and are fairly easy to buy or sell.
Investing in REITs during the pandemic could be a great opportunity for someone who wants to dabble in commercial real estate without the responsibility of managing a property. Plus, when the economy picks back up, those shares are likely to pay out nicely.
Although everything continues to change and evolve as certain states pick back up or shut down, these six tips should prove to be generally helpful in almost all markets. As with any commercial real estate investment, make sure to deeply research all opportunities and speak to financial advisors, like the commercial loan specialists at ComCapFL. Whether you have been investing for decades or are itching to get in the game, adding an additional seasoned perspective from our experts may open up additional investment opportunities that you might have not imagined possible!