Hedging Against the Effects of the Ongoing Pandemic on Real Estate Investments

The unpredictability of the past two years has made us all want a crystal ball to see where our industries are going. The economic burden caused by the pandemic, lockdowns, shop closings and consumer fears has had a heavy impact on many industries, but everyone wants a return to normal.

As we recently learned from the aviation industry and its spate of delayed and canceled flights, travelers want to return, but airlines are not as agile at restoring service: they have to balance labor, airfare and equipment with consumer demand.

In the commercial real estate sector, the retail and hospitality industries are facing major challenges in getting back to pre-pandemic levels. Recovery takes time, and the struggles in these sectors are the strongest indicator that things are not magically getting better in 2022 – or even 2023.

So what’s going to happen? What I hear from my clients is that planning for 2022 and beyond is about hedging against the effects of the ongoing pandemic and the threat of rising inflation while trying to appease evolving consumer preferences.

Here are my predictions for three sectors in the commercial real estate industry:

Hospitality:

• Hotels will bounce back as herd immunity rises and consumer fears related to the pandemic continue to subside, but slumps are still expected due to COVID hospital admissions, mask regulations and travel restrictions.
• Brands across the board allowed owners to force brand upgrades / PIP requirements for one to two years in response to the pandemic, delaying upgrades and hotel amenities.
• In response to supply and labor shortages and rising inflation, national demand for products will drive hotel prices higher and affect customer experience in the years to come.
• Hotels in the US could see an increase in occupancy as unvaccinated travelers, who in many cases are not allowed to travel internationally, must first select domestic destinations.
• As price pressures mount, luxury travelers may consider hotels with limited facilities to enjoy leisure travel.

Retail trade:

• As grocery stores and restaurants switched to roadside pickup and more flexible options, demand has exploded. Hence, property owners are working to make their tenants successful through more marketing and general traffic assistance.
• Many retail spaces are being redesigned to become safer and more efficient at the point of sale.
• The Internet is becoming increasingly important in the provision of products and services, so retailers will plan their consumer interfaces identically in terms of appearance, feel and efficiency at stationary locations.

office:

• Office locations that charge higher rents and parking fees are likely to suffer from a climate where more and more companies are enabling their employees to work remotely.
• The “work from anywhere” trend is not going away and has already affected the relocation of workers to the suburbs and small towns as workers seek a better quality of life. Many do not want to commute again and have proven that a flexible work environment can be more efficient and productive.
• However, many employees benefit from mentoring and interactions with experienced employees, which makes easy-to-change flex spaces a growing trend. This hybridization will continue as more office and warehouse space merges into a new, popular form of commercial property.

What do the future prospects of each of these sectors share? The need for flexible solutions. All moving parts in industry must be reviewed, recalibrated, and redesigned to cope with an ever-changing physical, cultural, and economic climate. In all cases, when there is change, there is opportunity.

Tanya Hart Little is the founder and president of Hart Advisors Group, a commercial credit consultancy based in Dallas. She can be reached at [email protected].