Utah commercial real estate feeling the impact of the COVID crisis – Deseret News

SALT LAKE CITY Commercial real estate, which is not immune to the economic challenges stemming from the new coronavirus, is seeing some of its segments experience dramatic declines in development and occupancy while others are primed for growth in the aftermath of the crisis.

If you look at some (general economy) numbers, there are projections (from economists) that (gross domestic product) will drop as much as 40-plus percent, said Lloyd Allen, managing director for the Salt Lake City office of commercial real estate firm CBRE.

Commercial real estate activity will track (closely with) the overall (economic) market and then youll see a reduction in overall leasing activity or reduction in sales activity that will correspond and in some ways, even exceed the market because our industry is one that tracks at a level but then lags at a level, also.

He said this year new commercial real estate transaction activity such as sales and leasing could decrease between 40% and 42%, but one segment of the commercial market that should prosper in the long run is the industrial sector.

Youll find in industrial leasing well have a 12 or so month lag, but itll kick back and even be a sector that benefits in some aspects because youll see a stronger growth in e-commerce, he explained. We expect an acceleration to products that are ordered online and delivered to your house. And that will drive industrial warehouse logistics at a base level.

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We also expect retailers to be more aggressive with respect to inventory control that drives industrial and warehouse (development and leasing). Although youre going to see a bit of a lag in the industrial sector, it will be the quickest to rebound and probably even benefit at some level from the changes to the market.

Allen said last year the industrial market had over 7 million square feet of new construction more than double the 3 million square feet from 2018. Even with the added square footage, the vacancy rate was approximately 3.4% below the 5% level that is considered statistically full vacancy.

If all this space doesnt end up leasing for a six- to 12-month period, were still going to be sub-4% vacancy in the industrial market for spec construction, he said.

Spec construction is a speculative venture for a builder or developer who has built a project with the intention of selling it for profit, either as is, or with minimal changes necessary for sale. Other market segments will likely have a harder time recovering, he said namely retail and office.

Retail is going to be the hardest hit sector out of this. I dont think thats a surprise to anybody, Allen said. The number of stores that are closing, the request for rent deferral, and even some rent abatement, is going to by far be the strongest.

The inverse of that is youre seeing home improvement stores and even stores like Michaels and Hobby Lobby those things that you do on a Saturday afternoon are doing a good business, he added. Were seeing some expanded requests for the Dollar Store sector. That said, where industrial it could be 12 months in getting back to where it was, retail is certainly going to be longer. It may be twice as long.

In the local office sector, projects may be insulated from some of the major challenges because of prudent forecasting and building planning that prevented overbuilding, Allen said. But in the new paradigm of social distancing, how companies will use office space going forward may shift the upper hand in lease negotiations from the landlords to renters, he added.

The market over the last couple or three years at least has been more of an owner or an investor market, Allen said. Itll probably turn more to a tenant market with tenants being in a little bit more control of what their destiny is going to be.

Nationally, analysts are watching closely at how firms choose to ease their way back into the workplace or maintain some of the policies that have been implemented in the wake of the COVID-19 crisis.

Much of America is planning its return to the workplace. While that is a welcome turn of events, we also need to acknowledge and embrace that companies will return slowly to a changed workplace with new procedures, said Spencer Levy, CBRE chairman of Americas Research and senior economic adviser. Office users likely will practice social distancing by rotating employee groups allowed into the office on certain days. Restaurants, stores and hotels will need time to reassemble their workforces and restock supplies while limiting in-person patronage. It is likely that society and business wont fully return to normal until we have a vaccine.

He noted as commercial real estate copes with ramifications of COVID-19, collections of April rent for office, industrial and multifamily came in at around 90%. However, April collections were below expectations for retail at between 20% and 40% on average depending on asset type. The industry is watching May collections even more closely as an indicator of the health of commercial real estate in the short term, he said.

Despite the tremendous economic challenges in front of us, pent-up demand from consumers and office users will provide a spark for spending and office use shortly after movement restrictions are loosened, Levy said.

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Utah commercial real estate feeling the impact of the COVID crisis - Deseret News