Commercial real estate during a pandemic

Different areas of commercial real estate continue to hold mostly steady through COVID-19 pandemic

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Although the Clark County area continues to experience high levels of unemployment and other economic issues during the current COVID-19 pandemic, the real estate market – both commercial and residential – continues to be at somewhat of an all-time high.

“Now commercial real estate encompasses the office market, the retail market, the industrial market and the multi-family market, and each of those are experiencing this pandemic a little differently,” said Adam Roselli, vice president/managing broker with Fuller Group Commercial Real Estate Services.

Roselli, who spends most of his time as a real estate expert in the commercial office market, said that the office market is actually doing relatively well, especially considering the current climate.

“Certainly a lot of us would say, ‘how does that make sense?’ with a majority of our working population working from home,” Roselli said. “And the answer, at least at this point, is people are in the middle of leases but aren’t failing as a business, so are not in a position of default or in a place where they want to give up their leases/spaces. Additionally, even those who have leases that are up for renewal, many of them don’t know what the long-term consequence of this event is going to have on the market and what the office situation is going to look like in the future.”

Roselli said some companies have indicated they will end up downsizing significantly because people are going to be more inclined to work from home. However, others have indicated their company is going to need more space because crowded cubicle life is not conducive to a healthy work environment. There are still others, Roselli said, who don’t anticipate much of a change because they will increase the flexibility for their employees to work from home when they can but still want a home base, and will want some functions to return to return to the office environment when it’s safe to do so.

“So with such, office vacancy rates are just about the same as what they were prior to this whole COVID mess,” Roselli said. “There have been winners and losers as with any major economic event. Losers in this environment are businesses that haven’t been able to generate their same income in the pandemic (general office space for a hotel management company or a chiropractor not able to see patients as local examples) but there have also been winners expanding in this pandemic (technology company focused on computer-based continuing education, logistics company with a major PPE contract, construction company with government contracts for infrastructure work, etc.).”

Roselli said he has also been seeing more businesses looking to potentially get out of downtown Portland or Multnomah County, which even further increases activity in the local Southwest Washington market. Because of this, Roselli said, businesses should not expect to see a significant drop in rental rates or a drastic increase in concessions. He also said many landlords are being flexible with free rent on the front end or with language that defers rental due to the back end of the term should the governor shut down nonessential businesses again.

“For the future, no one knows but my guess is it will be a lot of the same,” Roselli said. “Our office vacancy rates were already really low and office rental rates are fairly close to the same rates that were charged back in 2005. With rates that low and construction costs so high, you will see little new product hit the market and some shifting around from building to building but I don’t see anything drastic for our office market in the near future. I think vacancy rates, rental rates and concessions will all stagnate but not collapse as some would expect.”   

Although Roselli didn’t speak in depth to the other disciplines that make up the commercial real estate market as they aren’t his main field of work, he did offer his two cents on the other areas as he talks with other brokers and owners who have varying product. Here is his take on the current climate of industrial, multi-family and retail real estate:

Industrial

“Has weathered this well with a similar situation to office in which our market had a really low vacancy rate prior to COVID and vacancy nor rental rates have not changed much. Many of those companies cannot work from home and are still producing/selling product, so most industrial tenants and landlords haven’t struggled in this downturn and little is expected to change in our market looking into the future.”

Multi-family

“This is product- and rental-rate specific but generally the landlords I talk with have felt relatively secure with their multi-family product. There is a segment of lower-income tenants who are having difficulty paying coupled with landlords legally unable to evict but generally the product outside of low-income housing appears to be strong with stable vacancy rates and rental rates. There is a lot of new product hitting the market and there may be some difficulty hitting forecasted rental rates if the developer was too aggressive with their proforma.”

Retail

“This is obviously the most challenged of the disciplines with restaurants, salons, retailers, dry cleaners, etc., all being adversely affected by this pandemic. Many made it through the first round but I fear many others will not make it through a second round that in my opinion seems likely to happen this fall/winter. With such, go buy gift cards and try to support the restaurants and businesses you want to see make it through this tough economic time. If you are one of these tenants, keep the conversation open with your landlord and see if they can help. Some landlords have little debt on their properties, which give them greater flexibility to work with their tenants. Others have lenders who are offering flexibility to the landlords which they can then pass along to the tenants. Help can look like amortizing missed rent as additional rent over the remaining lease term or can look like abating rent in the near-term and tacking it on at the end of the existing term.” 

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Joanna Yorke is the managing editor of the Vancouver Business Journal. She has worked in the journalism field since 2010 after graduating from the Edward R. Murrow College of Communication at Washington State University in Pullman. Yorke worked at The Reflector Newspaper in Battle Ground for six years and then worked at and helped start ClarkCountyToday.com.