Covid and Commercial Real Estate
I cannot write this column without acknowledging the passing of Dickson Flake. I join so many others across Arkansas in mourning the loss of a friend. Flake’s contributions to central Arkansas are, in my mind, immeasurable. The ripples from all that Flake touched radiate across the state and will reverberate for generations. Many have stories of their interactions with Flake. One of my favorites came from a conversation I had with him many years ago. The short version is that it was my habit to address him as Mr. Flake. One day we were meeting at a property and he asked me to call him Dickson, but my reply to accept his invitation was to say, “OK Mr. Flake.”
Another thing Flake shared with me was the responsibility that commercial real estate professionals must attract the best and most investment in our communities. It could be a new shopping center, an office building, the Tech Park, or a business bringing aerospace jobs to the state. Or maybe it is a distribution center employing over a thousand people. Whatever the project, the ability to get people, goods and services to and from it is a key element.
That is part of the reason for the Port of Little Rock’s announcement of over $11 million of new investment in infrastructure. Safe and efficient infrastructure is critical to the commercial real estate industry and the communities we serve. We all rely on roads and transit to get consumers and workers to our properties. We also need reliable routes to get products to our stores.
Commercial real estate is a key driver of road and utility upgrades in our communities and contributes billions of dollars annually in property and sales taxes. Property owners work closely with municipalities to update water, electrical and other types of infrastructure to increase community connectivity. Commercial real estate is also a key component of successful transit-oriented development. Prioritizing infrastructure investment as a national priority makes sense, but sound infrastructure makes communities safer, creates jobs and grows the economy.
Meanwhile, Congress faces a September 30 deadline to renew the current five-year highway authorization. Given election-year politics, it may be that a stop-gap measure gets approved to push a long-term solution to 2021. Speaking for myself, I would appreciate the inclusion of strong support of local transportation alternatives.
In the past months because of COVID-19, commercial real estate has changed in ways never imagined. People can no longer meet, work, eat, shop and socialize as they used to. They have had to adjust from business as usual to cautious travel, office closures and working from home. Physical distancing changed the way people occupy physical space. The effects of the pandemic have slowed the demand for many types of space, even declining in some sectors. Most commercial real estate owners have made changes to protect the safety and health of employees, tenants and other end users. The smartest will now think about how the real estate landscape could permanently be changed in the future.
Since the virus outbreak, the steady cash flow enjoyed by many commercial real estate owners has changed, and some owners have been hit hard. Landlords and tenants have experienced struggles to address health risks for their employees and customers. Many property owners are seeing drastically reduced operating income and are nervous about tenants struggling to make their lease payments. Healthcare facilities, regional malls, lodging and student housing have experienced more challenges than self-storage facilities, industrial facilities and data centers. It is no surprise that avoiding crowds and limiting travel has had such an impact on commercial real estate and the tenants that occupy the properties.
There is speculation that the open plan and co-working trend in office space may emerge much differently. Building codes may be changed in the face of the risk of future pandemics. Standards for HVAC, square footage per person, and other metrics may be changed. Customers that have been forced to shop online may permanently shift buying habits for certain categories toward online shopping. Shoppers were already shifting from physical stores; this trend may accelerate as some retailers have been pushed into bankruptcy or forced to radically reduce their footprint.
Also, the U.S. has been a leader in the amount of retail floor area per person. This trend causing a large reduction in demand can lead to difficulty in finding replacement tenants for the closed retailers. And the shift to online shopping may increase demands for industrial space. Little Rock is benefitting from the growth of Amazon in central Arkansas while waiting to see what retailers and other businesses will close.
The depth of economic fallout from the worldwide pandemic on the commercial real estate sector is still uncertain. The world is still mid-pandemic with no gauge of when to expect the move to a post-pandemic model. But we can expect that changes will lead to significant space becoming obsolete. I am seeing a steady stream of advertisements for receivership services—a sure sign of impending opportunity for buyers of distressed properties. Commercial real estate owners must work to improve their businesses and be prepared for a future that could be tremendously different.
Send me an email anytime at Jeff@ARKcire.com. I appreciate the feedback, tips, and suggestions.