2020 will be a year to remember. Rarely do we experience a global moment of communal reflection and change like this. Every single industry has been impacted, with real estate development and project management being no exception. As owners, developers, project management firms and internal real estate teams continue to navigate this new normal, we have identified the top 5 most interesting commercial real estate (CRE) trends in 2020 - and how a robust technology strategy is more relevant than ever.

  1. Working from Home, or Living at Work?
  2. NYC and SF Markets are Getting a Run for Their Money
  3. The Bank is Open for Business
  4. Hospitality isn’t Dead – it Just Depends on What Type
  5. PropTech and CRETech Shine

Working from Home or Living at Work?

As 2020 wraps up, most of the country has successfully adjusted to some form of remote work. However, how offices and employers across industries are going to manage work arrangements during and even after effective vaccine distribution is an open question. The pandemic has dealt a very severe blow to the expectation of a rigid, 5-days-a-week-in-office schedule, and CRE professionals have been quick to adjust.

By remaining nimble, owners and developers have been able to pivot and transform their spaces or projects to best accommodate new ways of working - all without skipping a beat. Be it rethinking asset classes, re-envisioning office layouts to favor more conference and safe gathering spaces, or quickly adding necessary air purification or sanitization stations to meet safety requirements, the industry has shown great ingenuity. Also, co-working operators that may have struggled in the earlier stages of the pandemic are adjusting their strategies to benefit from the increase in flex-work arrangements; especially as many companies decide to give workers more options beyond main office vs. remote at-home in their post-COVID workplace planning.

Aside from changing office space in terms of square footage and geographic location, work-from-home or remote work impacts how commercial real estate professionals can, and should, operate. With lower expectations of managerial “face time,” there is a path for up-and-coming CRE professionals to navigate networking, generate more sales leads, manage complex development projects, or look at more deals with collaboration software, 3D tour visualizations, and other efficiency-boosting software. 2020 has laid the groundwork for cloud-based technology solutions to drive greater collaboration possibilities within and outside of the firm, industry-wide.

NYC and SF are Getting a Run for Their Money

Following the Great Recession in 2009, domestic and international investors doubled down on safe haven markets like San Francisco and New York City for a number of reasons. Property demand was high due to rebounding household formation, attractive rent and population growth. Coupled with the ability to attract and retain top tech talent and skilled labor, these areas witnessed many home-run investments. Occupancy rates were always reliably high in office1 and multifamily2, for stabilized assets, indicating a risk floor and liquid trading market for sales and investment exits.

If companies and workers do not want or need to congregate in expensive headquarters, and want to save expenses on recruiting and real estate, then the sublease and available office square footage will remain high in 2021 and beyond as the markets work out how to absorb and re-price the square footage. In addition, conference and tourism revenue leaving those markets this year and into 2021 could spur conversions of older hotels into multifamily, creating new opportunities for timely deals, but also more pricing and inventory uncertainty.

The premiere status of SF and NYC as safe havens has been undercut for the time being. Nevertheless, these cities have always benefited from their broad economic base in modern, knowledge-based industries and their general lifestyle attractiveness to seasoned professionals and young upstarts, which will still be the case after COVID. But it remains to be seen if real estate assets will simply change hands and experience a momentary revenue dip, or if the underwriting assumptions will change for at least several years.

The Bank is Open for Business

Even amidst uncertainty, capital for real estate owners and developers has remained available throughout 2020 in both traditional and unique channels. Specifically, there was a 12% rise from Q2 to Q3 2020 in new commercial mortgage loans issued, led by multifamily and industrial loan originations3. Loan workout activity has also been quite robust all year, as demonstrated by the volume of delinquent CMBS loans trending down sharply at the end of the summer, indicating that many loans were worked out right before fall began.

Since real estate assets and companies have generally enjoyed lower leverage and healthier debt service coverage as a result of the tough lessons of the 2008-2009 Great Recession, the capital markets did not freeze up this year. In other words, lenders (banks, debt funds, government- sponsored entities) were able to continuously evaluate and issue loans to real estate instead of imposing a moratorium. Real estate private equity fundraising had several consecutive strong years in the 2010s, reaching a peak in 2019, and those funds are still not deployed yet, meaning that there is equity capital looking for projects and deals.

The overall CRE market is not lacking capital, but is instead looking for the right projects to invest in. Many CRE professionals that benefited from this availability demonstrated a high level of organization, sophistication and technological savvy–all of which reinforced lenders’ confidence in their business operations and ability to be a trusted steward of capital.

Hospitality Isn’t Dead - it Just Depends on What Type

Hospitality has been one of the hardest hit asset classes this year, yet Airbnb experienced a significant valuation pop and extremely successful IPO in the final weeks of 2020. Hospitality has historically been the most cyclical CRE asset class, due to its shortest-term “leases” out of any asset class4; and, in cities such as NYC, there were already over-supply issues emerging before the pandemic5. However, the impact on hospitality has been very uneven, with many Americans continuing to travel (for either work or pleasure) or seek a change in scenery during quarantine via short-term rentals.

CBRE reported in November that “Lower tier, economy and midscale hotels in interstate highway locations...have witnessed the least disruption in operations and in value as they continue to accommodate essential workers, transportation professionals, healthcare workers, construction crews, and leisure guests. On the other end of the spectrum, upper upscale and luxury hotels dependent on large groups, conventions, inbound international travel and fly-to destinations have been the most severely impacted.”6

Hotel real estate data from 2020 shows that different types of hotels are experiencing diverging business dynamics, and the hotel sector should not be written off. Even within a distressed asset type, the asset class shows resilience when one parses out the data and looks more closely at the drivers behind trends.

Consumers, especially Americans, have a clear taste for travel, as shown by the recovery from the Great Recession, which ushered in many new hotel brands, formats, and travel tech. While travel patterns have changed, consumers’ desire for travel experiences is still strong and took on different forms this summer, such as road trips to national parks. Investors and developers who have available capital could benefit from hospitality deals involving drive-to locations for the upcoming travel seasons, since there is clearly proven demand for those hotels, as the international travel market will take more time to rebound.

PropTech and CREtech Shine

It’s no secret that commercial real estate has been slower than other high-skilled, knowledge-based industries to adopt cloud-based software and a digital-first culture. “Necessity is the mother of invention” proved to be the case for many CRE companies, to not only adopt Zoom, Teams, or Slack, but to also try virtual tour, project management and, cybersecurity software, among other tech-forward solutions.

While PropTech and CREtech have been on the scene for almost a decade, these waves in tech have focused primarily on consumer-facing amenities and smart buildings. Commercial real estate has traditionally relied upon relationships and in-person meetings to establish rapport and advance development projects. The pandemic has sped up that adoption via general workplace productivity tools, but also purpose-built solutions for property and leasing teams (virtual tours), construction teams (safety on-site), and real estate developers (remote collaboration to keep projects running on time and on budget).

Even if all-day video meetings go away, there are software solutions that owners and developers can benefit from adopting on a permanent basis after the pandemic. Project delivery software does more than just keep data, documents and records handy. There is predictive power in company data such as historical costs, accurate forecasting and benchmarking. Software beats intuition and the most successful companies, CRE or otherwise, coming out of the pandemic will be using their data as a competitive advantage.

2020 Wrap-up

2020 upended some of the real estate industry’s existing trends (such as disrupting stable office markets), while speeding up others (such as the rise of last-mile distribution centers and cloud kitchens associated with e-commerce). Companies and households will continue to grapple with their real estate needs and optimize their experience in 2021 and beyond. Real estate teams will have to continuously pivot and provide value, while maintaining team culture, and becoming more strategic and efficient. How is your team preparing for 2021? Follow us on LinkedIn or speak to our team today to continue the conversation.

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1 https://www.cbre.us/about/media-center/manhattan-h1-report and https://www.cbre.us/research-and-reports/San-Francisco-Bay-Area-Office-MarketView-Q2-2019

2 https://www.wsj.com/articles/once-booming-san-francisco-apartment-market-goes-in-reverse-11592472602

3 https://www.mba.org/news-research-and-resources/research-and-economics/commercial/-multifamily-research/quarterly-commercial/multifamily-mortgage-bankers-originations-index

4 https://hotelnewsnow.com/Articles/298034/Understanding-the-commercial-real-estate-sectors

5 https://skift.com/2019/08/27/tourism-is-up-so-why-is-new-york-citys-hotel-room-revenue-slumping/

6 https://www.cbrehotels.com/en/research/articles/the-covid-impact-on-hotel-values