What does the “New Normal” mean for commercial real estate?

Published May, 6, 2020

Holly Gardner, President

We hear a lot of talk about the “new normal.” I was admittedly not sold on the concept when the coronavirus crisis first appeared. It is hard to accept that your reality will be forever altered. It doesn’t happen overnight…even for the most forward-thinking of us. It’s a progression, typically based on experience. Your experiences will change, and you adjust to them, and as you see others around you shifting, you begin to accept that perhaps a new reality is evolving.

That was my path. A slow progression. From a knee-jerk reaction that we were all overreacting, to the acceptance of the seriousness of this virus but a disbelief that it would change everything, to a realization that it won’t “go away.” Just as other major health risks have altered our behaviors over time, so will this. Albeit, with a forced shut down, the behaviors were altered much faster.

So what will this “new normal” mean for commercial real estate? How should we be shifting and adjusting our behaviors in the industry? There are market changes that will shift our behaviors, and there are some deeper questions on building health and tenant needs that we need to be asking ourselves.

The unavoidable market changes as a result of Covid-19 have forced the end of the cycle that we’ve all been waiting for. Some are not ready to accept that the cycle is resetting, but I truly believe it. How could it not? We cannot reopen the economy overnight and the longer we’re restricted, the more tenants, businesses, and investors that are affected. And this is not just a local or national issue – it’s an international issue.

On the construction side, if we had issues with material costs and availability before, it’s going to be nearly impossible now. Manufacturing is struggling to get product out at reduced levels, and more money is not going to fix the issue. Many laborers are making more money on unemployment than they were as full-time employees, making it very difficult to convince someone to voluntarily return to work at the risk of their health for no increased compensation. So, we have now further restricted already restricting factors in the industry…labor and materials. We were overcoming these, just barely, by paying more money and driving rents to cover the additional expenses. We cannot continue to drive rents in this economy, so what options are left to us?

On the tenant side, businesses are re-thinking how they operate and how much space they really need, now that they’ve seen what they can accomplish remotely. Public gathering spaces, including restaurants, retail, and stadiums will still be avoided even after they’re allowed to reopen, impacting bottom lines. We’ve already heard that as much as 50-80% (depending on your source) of our restaurants may not survive this. We are all re-evaluating how we operate both personally and professionally. We also need to be re-evaluating how our buildings operate.

As we do during any downturn, we look for ways to innovate. How can we do it better? This is no different, except we have one very clear direction to focus our innovation around….the health of our buildings and tenants.

At The Schuster Group, we’re doing the simple things like so many: 1) Adding sanitation stations, 2) Creating building policies to better protect tenants and their customers, 3) Looking at cost effective improvements that help minimize exposure to germs and viruses. But we’re also thinking long term. How do we create spaces that encourage physical distancing and social interaction? How do we build flexibility into offices to allow for reduced footprints, but the same efficiency for those companies embracing remote working? How do we create street front spaces that engage the public for retailers, but allow them to operate in a manner that encourages “new normals” like online shopping and package pick-up? How do we create multifamily communities that meet the needs of physical distancing, but provide the amenities needed? We should all be asking ourselves these questions and thinking critically about the possibilities. Innovation creates opportunity, which creates growth. We need to grow our way out of this current predicament. So let’s innovate.

We’d love to hear what you are considering in your business. Please feel free to email or comment below. Innovation is best when not done in a vacuum!

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