Coronavirus accelerating CRE trendlines

The Covid-19 pandemic is expected to “accelerate” trends that were already taking hold in the commercial real estate industry prior to the health crisis, according to a prominent national trade group.

Along the Gulf Coast and into Central Florida, leaders with several of the industry’s foremost groups concur that while the novel coronavirus has generated upheaval and tragedy throughout the state, for much of the commercial real estate industry regionally, the disruption could be relatively short term — if new cases of Covid-19 diminish over the coming weeks.

In a webinar late last month, as the Covid-19 crisis was just beginning to grip the U.S., an economist with the National Association of Industrial and Office Properties (NAIOP) indicated that the health crisis could even lead to an industry expansion once the coronavirus abates.

The virus will “accelerate trends that had been forming in commercial real estate and cause dramatic changes in the industry faster than had been anticipated,” Dr. Timothy Savage, a NAIOP economist and New York University professor, contends in the webinar.

Savage also believes that the virus and the resulting shutdown of the U.S. economy also could ultimately produce positive results for commercial real estate sectors such as industrial properties.

As consumers turn increasingly to e-commerce as a way to purchase goods during the crisis and online shopping becomes more accepted, Savage predicts industrial fulfillment centers in key locations will flourish nationwide, following a temporary slowdown.

He expects development of distribution centers will experience a dip through the middle of next year, when demand will more closely mirror early 2019 — a particularly robust time.

That would be good news for Central Florida Development and other, similar builders who are active in the industrial sector in the Interstate-4 Corridor, between Tampa and Orlando, an area that can reach more than 18 million consumers within a five-hour drive.

“Certainly the long-term implications for the industrial real estate sector are good, especially if more people were to turn to e-commerce as is expected coming out of the crisis,” says Jeff Lucas, a Central Florida executive and the 2018 president of NAIOP’s Tampa Bay chapter. “And for Central Florida, it bodes very well, better than in many areas around the country.”

Lucas and others speculate that in the wake of the pandemic, medical-oriented manufacturers and even some retailers will begin utilizing warehouse space to build up inventories of essential consumer items and rely less on foreign supply chains for goods.

At the same time, if online shopping receives a further boost, purveyors such as Amazon, retailers and third-party logistics firms will need to increase infill development of so-called “last-mile delivery” locations around urban centers to meet consumer demand for speedy deliveries.

Pat Kelly, a regional managing director with Tampa-based brokerage and investment firm Franklin Street and another NAIOP Tampa Bay leaders, agrees that new industrial development — especially of cold storage and freezer space — will likely increase if online grocery shopping becomes part of the crisis’ legacy.

But while the industrial sector may fare well, office and bricks-and-mortar retail will likely continue the struggles each faced prior to the outbreak of the virus earlier this year.

For office space, the health crisis could perpetuate the trend of decentralized work places and cause at least some company owners to reconsider their space requirements, experts say.

“I do think that one outcome to this will be how people view office space,” says Chase Mayhugh, a senior advisor who specializes in investment sales with Fort Myers-based Mayhugh Commercial and a board member for the Society of Industrial and Office Realtors’ Florida chapter.

“As in, are they really necessary? For a lot of companies, their office space had been a showroom, but now, many businesses realize that they can make the lack of an office work, and that could have long-term implications.”

Kelly, too, says this crisis is different than any other he has seen over the past three decades and how it’s affected commercial real estate.

“People have just stopped going to work, en masse,” he says. “That’s what makes this different. I’ve seen an awful lot of economic cycles, but this one is unique in how it’s playing out, and in how rapidly it’s playing out.”

Retail space, too, that lack credit tenants or superior grocery anchors and were perhaps already suffering from deteriorating sales, will have an arduous time recovering from the pandemic, the experts warn.

“While I believe the short-term impact will in general outweigh the long-term, I do fear the retail sector, along with the restaurant and entertainment industries, could really be hurt. Social distancing may, out of necessity, be a part of our collective psyches for some time to come.”

While Kelly believes well-capitalized owners with solid locations will be able to weather the Covid-19 storm, he worries that small-business tenants in many Class B and Class C properties — and their landlords — could suffer.

He also expects some loans to slide into non-performing status if the crisis is prolonged.

“There’s a lot of forgiveness going on right now, between tenants and their landlords and landlords and their lenders,” he says. “Everyone is trying to make things bearable. But as time goes on, I fear there will be a moment in time when folks are not as forgiving. Will we see distressed properties come out of this? Yes, I’m afraid we will.”

Kelly and others, however, maintain that the coronavirus crisis could be either shorter lived than many anticipate or it could spur businesses to resiliency.

Lyle Fogarty, founder of Clover Investment Properties and a senior leader of the Urban Land Institute in Tampa, says the Covid-19 crisis could ultimately be analogous to the economic impact in the wake of the Sept. 11, 2001 terror attacks on New York and Washington, D.C.

“After 9/11, travel of all kinds was extensively stymied,” Fogarty says. “Changes were made. But in time, people got used to them, and prior to the pandemic, people were traveling more than ever before.

“We have as a species thousands of years of social interaction; I think it unlikely that we won’t go back to being together, even if modifications have to be made,” he adds.

Fogarty also expects that a collective pent-up demand will need to be satiated the longer the crisis drags on.

“I think we’ll be back quicker than not,” says Tina Marie Eloian, the owner and broker of Florida Commercial Group, in Tampa, and the past president of the CCIM Institute’s Florida chapter. “The show must go on. I’m telling people they need to be proactive, not reactive.”

McHugh also says he’s trying to focus on the positive and separate the short-term pain from the longer-term economics.

“We’re all trying to be cautiously optimistic,” he says. “There’s a lot of positive that could come out of this, too.”