August 5, 2020

Arnold/Norton: Commercial Realtors look for the silver lining

Three months ago, our neighborhood sidewalks were lined with encouraging messages penned in chalk, while homes displayed hopeful messages hung in windows and on front porches. “We’re in this together,” “You are loved,” “Be Kind,” the messages read. A house for sale displayed a wooden sign on the front porch that read “Every cloud has a silver lining.” Was that a carefully selected staging sign to address the world crisis, or just a general reminder to look for the positive? Perhaps it should have read “Keep calm and buy real estate.”

In the world of commercial real estate, where is that silver lining of this economic climate caused by the pandemic?

Let’s start with the market trends we’re seeing in retail and office. It’s no surprise that the retail sector shows a decrease in the rate of absorption and rent growth compared to the three-year average. It would be naïve to believe that it won’t get worse as business owners’ PPP loan funds and landlord concessions dry up over the second half of 2020. Prior to the pandemic, the office sector was showing a considerable negative net-absorption, suggesting that large floor plate office will be seeking efficiency and downsizing when given the opportunity. We expect renewals for less square footage and negotiations to downsize to be prevalent in the coming months as the office market recalibrates.

While the list of industries with the largest chance to survive and thrive during this time is short, there is a list. Many businesses are still hiring, and certain industries continue to perform, including grocery, discount stores, home improvement stores, financial institutions, service providers, and multifamily to name a few. For the more susceptible industries, now more than ever is the time to adapt or die. As social distancing and stay-at-home orders will certainly be the final nail in the coffin for many already-struggling businesses.

Ready for that silver lining? Tenants, landlords, and investors can all find opportunities in this environment to survive and thrive.

Dear Tenants,

Get creative about ways to serve your customers during this time and beyond. Your competition may be dwindling, so now is your time to shine. Find a way to get your product or service to them in a safe and virtual way. It’s 2020, and technology can do more for us now than ever before. Consider brick and mortar retailers that had little more than a website as their online presence prior to March. Now many of them are sporting a game-changing online ordering system. Medical care providers have fast forwarded their tele-medicine business plan to continue serving their patients. Restaurants that are thriving are sourcing 80-90% of their sales from carryout only. Online and phone ordering, paired with curbside pickup, limited hours, and staff reduction may be just enough to keep you afloat, and keep your customers satisfied and loyal. When this is over, we may end up more dynamic businesses retailers who have blended the online and brick worlds they operate in. 

Dear Landlords,

With interest rates at a jaw-dropping low, now is a great time to refinance your investment. You’ve almost certainly been working with your struggling tenants over the last few months, making rent concessions and special arrangements. Even so, you’ll likely experience a casualty or two in your portfolio. When you do experience a vacancy and must procure new tenants, look for tenants offering services that will be in high demand right now, like counseling groups, attorneys, CPAs, health/medical, and discount stores to name a few. Lastly, use this time to complete property improvement projects now that would typically disrupt tenants, like paving projects or construction.

Dear Investors,

Keep calm and buy real estate. Incredible rates aside, now may be a great time to pick up distressed properties. With a large percentage of tenants unable to pay rent, owners who lack the reserves or aid to help cover their debt service will be looking to unload it. Be patient, as this may take several months but a much-needed price adjustment in investment commercial real estate may be in the future depending how long the pandemic difficulty lingers.

This unholy union of a health crisis and economic recession has and continues to cause global heartache and chaos, yet the juxtaposition of the two lends us perspective we may not otherwise have — that little matters above our health of our family, friends, and neighbors. Even so, rest assured that it’s not wrong to find opportunity in a time like this, it’s natural.

Jake Arnold is director of brokerage at Waypoint Real Estate in Fort Collins. Nick Norton is a broker associate. They can be reached at jarnold@waynpointre.com, nnorton@waypointre.com

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