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What’s the future of commercial real estate?

It's not what you might be expecting

Kristen Herhold //February 16, 2021//

What’s the future of commercial real estate?

It's not what you might be expecting

Kristen Herhold //February 16, 2021//

In light of the coronavirus, investing in commercial real estate right now can feel risky.

Last March when the pandemic first struck, nearly 90% of businesses worldwide closed their doors and encouraged employees to work remotely. Although the initial phase of this shift was a shock to the senses, people eventually became used to working from home; now, according to a recent report by Clever Real Estate, 63% of employees say they prefer to work from home rather than in the office.

That same report revealed that 53% of larger organizations plan on scaling down their office sizes after the pandemic and that the shift to a virtual work environment could have long-term effects on the commercial real estate industry.

These larger trends are reflected in the Denver metro area as well. At the end of last year, office vacancy rates were at their highest levels since 2011, according to CBRE research, and employers with office space in Denver let go of 8,400 more jobs through November as compared to the same period in 2019.

Moreover, a McKinsey Global Survey of executives conducted last year revealed that 62% of respondents believe the changes brought about by the pandemic (such as increased remote work and customer preferences for digital products and services) will stick around after the recovery.

Is Commercial Real Estate Dead?

Taking all of these factors as a whole, it seems the commercial real estate sector has permanently changed. With increased remote work and PPE measures being installed, co-working spaces will likely be on the rise, but offices will certainly not be as large or prominent as they once were.

This does not mean, however, that the commercial real estate market is dying. Rather, the needs of consumers have just shifted, and opportunities have opened elsewhere, such as multifamily housing and industrial real estate.

In the wake of the pandemic, Denver has become one of the most popular cities for people relocating. This increase in new residents has spurred demand for housing, and sales of multi-family homes have continued to outpace previous years. According to research by the Denver Metro Association of Realtors, there were 22.6% fewer condos and townhomes on the market in 2020 than in 2019, but average sales price had increased by 7.7% due to increasing demand. Inventory is incredibly low right now, and the need for more multifamily options is undeniable.

The industrial market also saw a dramatic increase in activity last year. While there was an initial lull in activity in the early part of 2020, by the end of the year, more than 3.4 million square feet of warehouse, manufacturing and other industrial space was acquired by new tenants, a near 15% year-over-year increase from 2019. Additionally, there is currently another 8.2 million square feet of industrial space now under construction.

Who are these industrial tenants? Well, in addition to Amazon, these companies include Wayfair, Lowe’s, Costco, and other big box brands that offer virtual delivery and ordering services.

Commercial Real Estate Is Here to Stay—But the Pandemic Has Permanently Changed It

If you do decide to invest in commercial real estate, then you should definitely hire an attorney, as these transactions are quite complicated. An attorney will make sure you meet all your legal requirements and also carry added weight during negotiations. Using a local realtor can also help your investment journey by finding a property that suits your goals and keeps your best interests in mind. Note that you can negotiate commission rates with your agent.

If physical property is too big of a commitment but you still want to dip your toes in the commercial market, then consider investing in REITs, which are viewed as a traditionally safe investment even during volatile times. REITs tend to offer high dividends, which can then be reinvested in order to compound the wealth generated.

Although consumer preferences may have changed, the need for commercial real estate still remains. Just be smart about where you invest your dollars, and do your research before making any big commitments.