For most commercial real estate sectors, the pandemic was brutal. Everything from the safer-at-home lifestyle to manufacturing and transportation shutdowns played a role. Whether your portfolio included stores, restaurants, office space, and hotels or experiential properties like movie theaters and casinos, you probably weren't too thrilled with how your investments were performing.
Fast-forward to the present, and people are getting back out there and living their lives. This is great news for real estate investors. And in fact, the resiliency and adaptability commercial real estate has demonstrated may just be the most compelling reason to invest in it. Let's take a closer look at how this is playing out in a few commercial sectors.
Essential retailers like supermarkets and dollar stores thrived during the pandemic, but many nonessential retailers were much less fortunate. All told, over 12,000 retail stores closed their doors for good in 2020. It was beginning to look like the retail apocalypse -- the long-held notion that e-commerce would eventually bring about the end of physical retail -- was being realized, courtesy of the pandemic. But then fewer than half that number of stores closed last year and many more opened.
Ordering everything you want or need without even have to get dressed or set foot outside is certainly convenient. But the isolation many felt during the height of the pandemic greatly reduced that appeal. Retail property owners are adapting to this increased desire people feel to get outside by creating more open-air shopping centers. This includes "de-malling" their traditional mall properties, or remodeling them to eliminate the interior common spaces and make each store accessible from the outside only.
According to commercial services firm JLL, these types of open-air shopping centers commanded rents nearly 50% higher than those traditional malls were able to bring in last year. So it appears that physical retail is here to stay, so long as operators continue meeting consumers where they want to be.
Office space investors have been keeping a careful eye on the remote-work situation throughout the pandemic. Some companies are allowing remote work permanently going forward while others are pulling everyone back into the office full time. Many others fall somewhere in between and are leaning toward some sort of hybrid arrangement. Office space is also increasingly adapting to workers' concerns, incorporating advanced air filtration systems, contactless doorknobs and faucets, and even plenty of outdoor space.
So what does all this mean for office-space investors? Commercial real estate services firm CBRE's Spring 2022 Occupier Sentiment Survey gives us a peek into how 185 companies are thinking about office space going forward. While 52% plan to reduce their office footprints over the next three years, 39% actually intend to expand their use of office space.
Of course, it's impossible to tell whether the net effect on office space will be positive or negative without knowing just how much expansion and reduction these companies are looking at. What is clear is that the office is far from dead.
Warehouses are unique here in that they never really had to adapt to the pandemic. Sure, precautions like masking and social distancing were put in place, but warehouses as a whole didn't have to revamp their strategies in any way to stay profitable. Industrial real estate will always be needed to store and move product regardless of whether customers are purchasing that product in person or online. That's why investors who already had a good chunk of industrial property in their portfolios before the pandemic began may have been happier than most during the worst of it.
So if anything, the pandemic only served to highlight what a secure investment warehouses are. That said, this sector is vulnerable to issues like labor disputes and communities resistant to new warehouses moving in. But these are issues that can be worked through on a case-by-case basis, not a threat to the sector as a whole.
Commercial real estate endures
Most of us are social creatures, and most commercial real estate is about bringing people together in one way or another. If we must be apart for a while from time to time, so be it. But we will always ultimately come back together. We also grow and change, and the pandemic has proven that as we do, commercial real estate will find ways to adapt to those changes. That's why commercial real estate is worth investing in, perhaps now more than ever.