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Potential Changes in Office, Retail, and Residential Construction in the Post-COVID-19 Market

May 27, 2020

Overview

The shelter-in-place orders during the COVID-19 pandemic have altered the way we work, play, and interact. Retail establishments have been forced to close or dramatically change the way they operate. Many office buildings are sitting idle as staff work from home in a new virtual business environment. The hope is to get back to a semblance of our normal lives once this threat has lessened. However, the pandemic has created financial pressures on many businesses. It has also introduced new ways of working that some employers and employees might not want to shed, now that states are starting to ease restrictions. The post-pandemic environment will likely look different in many ways, and it will have future impacts on the office, retail, and residential construction markets.

Due to financial pressures created by the COVID-19 pandemic, there will likely be reduced demand for commercial real estate due to a potential short-term glut in the market and a continued increase in telecommuting. If businesses continue to fail in a virus-induced recession, office and retail vacancies will rise. Vacancies will be most pronounced in areas where the pre-pandemic economic boom led to speculative office construction and areas where post-pandemic employment levels and/or patronage take years to rebound.

Office

Technology has proven that it can often act as a proxy to in-person meetings. At a recent seminar called Tips and Techniques to Succeed with Virtual ADR, JAMS reported that it has been able to conduct virtual hearings for more than a decade. Yet for virtual dispute resolution to take off, it had to achieve client and attorney acceptance. More than half the participants at the seminar expected at least one party to participate remotely in mediations occurring after social distancing restrictions have been lifted. At our law firm, a surprising number of the attorneys surveyed indicated a willingness or desire to continue to work remotely at least part of the time. Facebook announced on May 21, 2020, that it would allow many employees to work from home permanently. (Facebook Starts Planning for Permanent Remote Workers, New York Times (May 21, 2020).) While people are social creatures and face-to-face interactions will always be needed to some degree, our experiences working from home, supported by rapidly evolving platform such as ZOOM, may well accelerate the trend toward innovative and flexible work arrangements, such as hoteling or scheduled shared work space.

For many, eliminating the daily commute grind is reason enough to make teleworking the new normal. The environmental benefits of social distancing are also becoming evident. Air quality in many large metropolitan areas has improved remarkably during shelter-in-place orders. CBS News reported on April 29, 2020, that Washington, D.C. is experiencing its cleanest spring air in a quarter century, while Los Angeles is boasting some of the best air quality in the world. In March 2020, NASA observed a 30% drop in nitrogen dioxide levels in the air compared to the same month in previous years. While many local governments already have programs to encourage commuters to carpool or take public transit, local governments could potentially create additional incentives for companies to encourage employees to work remotely.

All things considered, a lasting consequence of the pandemic may be more flexible work environments and reduced need for designated office space. This could add to a contraction in the office market.

Retail/Restaurants

As many retail businesses are either going dark or struggling during required closures, consolidation may continue and there will most likely be a short-term pause in retail construction. On May 4, 2020, Retail Dive identified 27 major retailers that could file for bankruptcy as the pandemic roils the industry. There is a growing list of restaurants that have closed permanently, and some industry pundits have opined that the restaurant industry will never recover.

“Recover” could mean many things, though, and changing and adapting is a form of recovery. In the future, retail and restaurants will continue to thrive because people are social beings. The trend away from large malls and toward mixed-use development, which includes offices, living space, as well as retail stores and food and beverage outlets, should continue post-pandemic. While online stores have affected many brick-and-mortar retailers, the demand for physical retail space still remains. In fact, many online retailers had actually been investing in storefronts prior to the pandemic. This is evidenced by Amazon’s purchase of Whole Foods and its opening of Amazon stores and outlets.

Once all the restrictions are lifted, people will eventually start shopping and eating out again. There will be some differences in the retail experience as businesses adopt new safety procedures, such as a proliferation of hand sanitizer throughout each location, limiting the number of patrons, more frequent cleaning, or the introduction of bathroom attendants to disinfect after each patron.

In addition, future retail spaces could be designed or adapted to better adopt post-pandemic procedures and business realities such as social distancing. These changes could have impacts on profitability, but many retailers will adopt necessary measures to make people feel comfortable again.

Residential

Even before COVID-19, the residential market was already underbuilt. This problem was exacerbated during the stay-at-home order and the associated limits on construction during this period. As states ease restrictions, costs will likely increase to implement required social distancing and sanitation measures.

A lasting impact of the pandemic may be a continued trend toward the inclusion of specialty rooms, such as home offices and exercise rooms, in new homes. National Association of Home Builders’ (“NAHB”) most recent consumer preference study, What Home Buyers Really Want, conducted in 2018, showed that 65% of home buyers want a home office. The demand for exercise rooms grew from 27% in 2003 to 40% in 2018. Housing Trends, May 13, 2020.

Another trend sparked by the pandemic is a shift away from high-density urban centers—where the virus circulated like wildfire—toward lower density suburban areas. With an increased reliance on teleworking, the proliferation of food delivery services, and new homes being better equipped with offices, the commute issues that have encouraged urban living may no longer drive home selection to the same degree as in recent decades. No commute still beats a short commute.

While many sectors are expected to recover in the long term, the impacts could result in changes in the way we work and live. The extent of the pandemic’s effects on commercial, retail, and residential construction will not be fully realized for many months, if not years, to come.

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