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Impact of COVID-19 on the Commercial Real Estate Market

Posted by Eric Olsen, CPA on Jul 6, 2020 7:45:00 AM

Commercial real estate owners and brokers across the U.S. are determining the long-lasting effects of the COVID-19 pandemic on their industry. A new report from TD Economics that examines the long-term impact on commercial real estate predicts a surge in vacancies because of the pandemic. Vacancies typically result in lower rents.

Already, many landlords are grappling with rent shortfalls and increased requests from tenants for contract renegotiations. Some U.S. state legislators have proposed measures that would require commercial landlords to renegotiate with office tenants financially affected by the pandemic. On the bright side, the need to separate workers may necessitate additional space for certain employers. Others may look at new models that allow for onsite and remote workforces.

Rapid Increase in the Remote Workforce

Long before the pandemic, the U.S. remote workforce was on a steady rise. According to a 2018 Upwork Study, 63% of U.S. companies had remote workers, and 43% of employees worked remotely at least part of the time. Now that employees have proven they can effectively work remotely during the pandemic, several large tech companies, such as Twitter, Square, and Facebook, have announced plans to allow employees to work at home indefinitely.

A significantly larger remote workforce is certain to have an impact on the commercial real estate industry. With more people working at home, there will likely be decreased demand for commercial office space. Instead, there will be a focus on retrofitting existing office space to comply with safety measures and to accommodate workers who will split their time working in the office and remotely.

The sharp increase in remote work will level out somewhat once the virus is contained, but by how much? The pandemic is underscoring the ability of workers to use technology to remain connected to one another without missing a beat in productivity. At a minimum, the outcome will be a more flexible work arrangement that includes telework, and employers will be looking at ways to make existing office space accommodate these arrangements.

According to a March 30, 2020 Gartner CFO study, nearly 75% plan to move at least 5% of their workforce to permanent remote positions, and almost 25% said they would move 20% to remote positions. Cost containment is a significant factor in these decisions—many CFOs are looking for ways to manage budgets without making steep cuts during these challenging times. The Gartner survey revealed that 13% of respondents report having already reduced their real estate expenses, with another 9% planning to do so in the near future.

It will also be imperative for building owners and employers to continue safety measures well past the pandemic. There is too much uncertainty about the efficacy of vaccines and further outbreaks of COVID-19 or other viruses to come. Co-working and flexible space companies, once an attractive draw for the commercial real estate industry, are now a victim of the pandemic, with its emphasis on separate working spaces. Some are hoping to bounce back as larger companies spread out their workforces and lease less space at headquarters locations.

Looking Ahead

COVID-19 will undoubtedly have an effect on the commercial real estate industry, though how much will call for the continued tracking of evolving models. Developers of office and other commercial space simply don’t know its full impact right now because, in many cases, leases, purchases, and sales have gone into pause mode. Some banks are offering payment deferrals and waiving late fees.

Already, commercial landlords are troubleshooting rent shortfalls and office lease restructuring requests due to the pandemic. As building owners try to hold the line on rents, an increased remote workforce may provide owners and tenants the flexibility they will need to adapt their strategies now and after the crisis.

Questions about strategic planning or other real estate and construction issues? Our real estate accountants can help. Contact Eric Olsen at (214) 635-2538.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: COVID-19, Real Estate