It is positive for the economy as a whole, not to mention for the health and wellbeing of the people around the country and across the globe, that the COVID-19 pandemic seems to be increasingly manageable. This, in turn, has led to significant speculation about the ability of the markets to bounce back to pre-Covid levels.
Along with this assumption is the wishful thinking that the commercial real estate market can also recover quickly. The belief is that it will immediately provide opportunities for investors at all levels to swoop in and take advantage of low prices on distressed properties in major cities and smaller towns around the country.
Some of the hardest hit sectors include hotels, retail outlets, and restaurants. For investors, these distressed properties offer the potential of picking up properties at a price well below market value. This is not without a high level of risk, as there is still a noticeable decrease in the potential income earning ability for these properties. It isn’t easy to open a restaurant, hotel, or retail outlet at any time. Now, with the added difficulty of getting already hesitant customers into venues and away from online ordering, the challenge adds to the investment risk factor.
It is true that government assistance to businesses and individuals has provided some support to shore up businesses and allow them to hang on to rental units or commercial property. However, it is anticipated that this tentative hold for many of these businesses and business owners has reached the failing point, particularly with the lower-end income earning companies.
A factor that has also come into play with commercial real estate is the work from home shift. Many businesses, both small and large, have made a choice to continue some level of remote work for non-essential employees. This change impacts the commercial real estate sector in two ways. It decreases the demand for office space while also adding to the available space on the market.
According to the CommercialEdge National Office Report completed in April of this year, the lease rates are actually increasing by 1.4%, while the vacancy rates are about 15.6% throughout the larger cities in the country. The report points out that remote work is only one factor contributing to this increase, with new property construction coming on the market another critical factor.
For investment purposes, high-end business and commercial properties are still considered a good investment strategy. While these properties are not sold at distressed levels, they attract tenants that are willing to invest in quality commercial space.
In summary, it is a mixed prospect for the future. Qualified borrowers for commercial real estate can take advantage of low interest rates and favorable lending options, adding to their commercial real estate holdings. Choosing the higher-end commercial real estate investments, despite the low prices of distressed properties, may offer a better return on investment both short-term and in the foreseeable future.
