Real estate market

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The pandemic is having a widespread and long-lasting impact on the overall business environment. Although certain sectors have been able to recover, some are still suffering and seeing a structural change in the way business is being conducted. The commercial real estate sector has been severely affected. Investment in direct commercial real estate fell by a significant 29% globally to USD321bn during the first six months of 2020. Lockdowns and other restrictions during the initial months of the crisis led to a reduction in occupancy, and uncertainty surrounding when tenants will return remains, posing risk to owners.

What are the immediate concerns for the commercial real estate sector?

Cash-flow issues:

One of the main problems is the realisation of rent. Most companies have deployed the work-from-home (WFH) strategy, and due to non-use of rental property and most businesses facing cash-flow problems, property owners are forced to relax rent payment structures. Real estate owners with either mortgaged properties or properties built using loans are facing the strain of mortgage payments as rent payments decline.

Operational inefficiencies:

Builders and developers of commercial real estate face operational issues due to the pandemic. Buildings are incomplete or construction has been suspended due to a lack of workers or the unavailability of materials due to the closure of businesses. Developers are also finding it difficult to obtain completion certificates and process other administrative procedures with the respective authorities. The crisis would also affect the start of new developments, due to the uncertainty surrounding economic recovery and recovery in demand for new properties for purchase or rent.

Will the commercial real estate sector face structural problems?

The US commercial real estate sector will face not only short-term but also long-term problems. If companies adopt the WFH framework as a long-term solution. This could impact companies’ long-term demand for rentals as they look to reduce operating costs. This would lead to a demand-supply imbalance, with high supply of commercial. Property and low demand resulting in lower rental yields and hurting commercial real estate owners.

Apart from office space, commercial real estate in the form of shopping malls, gaming arcades, and even hotels and restaurants could see a fall in demand or permanent closure due to extended lockdowns, leading to high losses.

Has the crisis presented any opportunities?

Commercial real estate companies and business owners could focus on converting. Their properties into data centers or storage houses – in high demand. As consumers shift to e-commerce transactions and demand from e-commerce companies for storage of goods increases.

Real estate owners and developers would, however, need to chart long-term visions for their business as the economy recovers. The situation could also provide an opportunity for companies. Looking to obtain distressed assets or valuable properties at lower prices than normally possible.

Real estate owners could also convert their properties into quarantine centres for a short while. This would ensure use of the properties and generate goodwill for the owners.

Conclusion:

The sector may face short-term difficulty until working from office resumes. But in the long-term, demand may fall due to the adoption of technology and the WFH option.

Banking or insurance companies that may have extended loans to real-estate owners. May also be in difficulty, but they could consider underwriting and sharing costs as the sector recovers.

By admin

Writing and blogging is my passion. Providing meaningful information to readers is my object.