Armanino Blog

6 Real Estate Trends in Our New Normal

by David Erard
July 23, 2020

After three months of shelter in place, we’re all wondering how a shift to permanent remote work could affect the real estate market. To get an idea of the biggest management, development and investment trends in our new normal, we sat down with Alex Mehran Jr., president and CEO of Sunset Development Company, Eric Bergstrom, president and founder of Bergstrom Capital Advisors and Lance Graber, managing principal of investments at FrontRange Capital Partners.

Here is a summary of their collective views, including which changes are here to stay and which are only temporary.

1. The market is open on the residential side, but commercial and retail lag behind.

Graber: Early on the focus on the residential side was on tenant and employee safety — closing down common amenities and limiting social interaction. Once we got through the safety phase, the primary focus turned to collections.

In March and April, there was a big fear that the industry was going to be exposed to a large number of tenants unwilling or unable to pay rent. When the statistics came in, we were pleasantly surprised. Collections in April were about 95% of billings industrywide, and that has continued in May and June.

There are a couple of theories as to why it has been so strong. The primary one is that the government stimulus, including supplemental unemployment insurance, has enabled people to focus on prioritizing rent and protecting their living arrangements. Retention has also improved. We are seeing higher renewal rates (at flat rents) than we have seen historically.

Mehran: In retail and office space, it has been the opposite of residential. When shelter in place hit, the people that were there were suddenly gone. We had 133 tenants ask for rent relief. They fell into three buckets: those that went to zero revenue, such as everyone in our shopping center; those with severe impact; and unfortunately, a few opportunists.

Only 10 of the 133 tenants had monthly rents over $10,000, which are tenants with more 3,000 square feet. The requests were predominately from small businesses that were severely impacted.

2. Uncertainty in the market will spur opportunistic investments.

Bergstrom: On the equity front, the distressed opportunity funds have already started to form. They may not be very public, but they are coming and will continue to grow. Others believe this is going to pass quickly and are striking early on the development side. Those equity funds that have already deployed their capital are focused on taking care of their existing investments. It really depends on the particular equity source.

3. Top developers are reallocating their resources and offerings to meet the demands created by COVID-19.

Mehran: We’ve instituted four major pillars for reopening our office space. First, we’ve implemented health screenings and temperature checks as a tone setter. Second, we require mandatory mask wearing. Third, we’ve instituted COVID-19 testing onsite with the county. And finally, we’ve evaluated building safety recommendations for foot traffic, reduced seating, extra partition height and more. We’ve been very open about this, and tenants really seem to appreciate it.

4. The death of the urban office is temporary, but remote work will permanently change suburban residential property.

Bergstrom: There is debate in the market about whether people will continue to permanently work from home. When it comes to site planning on the residential side, you have to account for that. We will see more development of suburban apartments with larger units, and it will be critical that amenities include coworking areas and streaming.

Graber: I don’t think we will see a permanent death of the urban office. That is a temporary phenomenon. Moving forward we will see more tech jobs created in urban areas. On the residential side, everything we built for the past 10 years was postage-stamp-sized units heavily concentrated in urban areas. As millennials get married and have children, they will seek more space and better schools. We were already starting to see de-urbanization before COVID, but now the trend is accelerating.

5. Ridesharing and delivery services will force site planners to think differently.

Bergstrom: The biggest impact of COVID-19 on the multifamily front is the increased need for Uber and Lyft pickup and delivery zones. This is also key for site planning on the retail side — developers need to think about how they are planning for food delivery and pickup systems. If drivers can’t get to your business quickly enough, they aren’t going to service it.

6. The acceleration of online retailing will put some brick-and-mortar stores out of business, but what retail loses, industrial will pick up.

Graber: Online retailing is just under 15% of total retail sales today. The projection is that it will grow to 25% over the next five years. The impact of that will mean 100,000 stores closing over that five-year period, which is three times the number of stores that closed during the great financial crisis.

That does not mean retail is dead. Omnichannel retailing and being able to get products to customers quickly and cost-efficiently will be critical. What we saw with toilet paper, paper towels and cleaning products is that the idea of just-in-time inventory doesn’t hold up in an environment like this.

There will be a greater demand for warehousing solutions for supply chain management. The expansion of e-commerce is projected to result in an incremental 400 million square feet of demand on the industrial side in the next two to three years.

For the latest information on navigating the new normal, visit our COVID 19 Resource Center.

July 23, 2020

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