The future of commercial property considering the COVID-19 pandemic

The COVID-19 pandemic is leaving lasting impacts on businesses across industry lines, vastly changing how their commercial buildings are utilized. Between the rise of remote work, a surge in e-commerce, and major population shifts throughout the country, the overall trajectory of the commercial property market has significantly changed in the past year — posing challenges and new opportunities for many businesses.

Specifically, maintaining building occupancy has become a growing concern, leaving some properties vacant and exposed to new risks. In response, some businesses have repurposed their spaces or added new amenities to accommodate updated workplace norms and foster hybrid environments. As such, businesses of varying sectors have a lot to consider when it comes to keeping their buildings operational in this evolving landscape. This article provides an overview of post-pandemic commercial property trends among various industries and best practices for effectively navigating these changes.

Post-pandemic commercial real estate trends

Although most businesses experienced some degree of commercial property adjustments due to the pandemic, those in specific industries encountered a range of sector-specific challenges. Here’s a breakdown of property trends between sectors.

Retail spaces

Even before the pandemic emerged, businesses throughout the retail industry were already struggling to attract in-person shoppers due to the growing popularity of e-commerce. When pandemic restrictions were implemented across the country — forcing many retail businesses to close their doors — this further exacerbated the rise of e-commerce. In fact, online retail sales continued to surge throughout 2021 by over 14%, accumulating more than $870 billion in overall sales. This total represents the most considerable annual online sales growth in history.¹

E-commerce has continued to present profitable opportunities for businesses, and the surge in online shopping has resulted in lower utilization of many retail spaces, leading to a continued influx of unused property in the post-pandemic world. Vacancy rates across retail properties had an average of 4.9% in 2020 and 2021. Brick-and-mortar retailers were hit the hardest even though they are open again after lockdown. Many businesses cannot operate in the same capacity pre-pandemic, while other businesses have permanently closed.²

Yet the effects of the pandemic and its associated e-commerce trends on retail space usage vary based on the type of business. For example, strip malls in populated residential areas are doing well. Businesses such as grocery stores, salons, and other retailers that offer in-person services have helped strip malls with their strong performance in the first half of 2022. Unfortunately, Class B and Class C malls continue to struggle. It’s suggested that these malls be repurposed for affordable housing, market-rate housing, warehouses, or fulfillment centers.³

Office spaces

The pandemic forced a substantial number of businesses to transition to fully remote operations, permitting their employees to work from home. 59% of U.S. workers say their jobs can be done from home; currently, six-in-ten of these workers work from home all or most of the time. In fact, 83% of this population said they were working from home even ahead of the spread of the omicron variant.⁴ Even as businesses have reopened their workplaces, a considerable number of employees have opted to remain remote, leaving office spaces significantly less occupied.

Although certain businesses have decided to eliminate their office spaces entirely, shifting to remote operations for the foreseeable future, the office vacancy rate has declined post-COVID. In quarter 3 of 2020, the office vacancy rate was 15.5% which then increased to its highest point at 17.2% in quarter 2 of 2021. However, the rate dropped to 12.3% in the first quarter of 2022.

On the other hand, some businesses are still looking to have their employees return to the office, whether it’s full time or via hybrid models. In these cases, various property changes and workplace incentives may be necessary to encourage employees to return. These property changes may include adjusting office layouts to promote social distancing and greater privacy, upgrading HVAC systems to ensure fresh indoor air and providing improved technology to better communicate with remote workers. Further, workplace incentives could include childcare assistance, transportation reimbursement, cafeteria improvements and outdoor activity offerings.⁵

With the labor shortage and some industries requiring workers to come into the office, companies are hoping to lure talent with office amenities such as outdoor space, catering, and daycare. Also, due to hybrid working environments, businesses no longer need several hundred square feet for employee and can rethink how to calculate how much space is needed for people who do come into the office.³

Housing spaces

With many remote workers no longer tied to a physical location to perform their job duties, the pandemic has caused major changes in the housing industry. Some individuals opted to move farther away from their respective workplaces, thus investing in their home offices and avoiding the elevated costs of living in more populated cities. In fact, remote work prompted people to buy larger homes to accommodate their new working-from-home lifestyle. This demand caused a 23.8% increase in home prices during the pandemic.⁶

Amid a higher demand for suburban homes, these properties’ prices have risen, making it increasingly difficult to secure affordable housing. To provide more cost-effective properties, modular construction may become more popular. Modular construction refers to the process of building each section of a property at a safe and secure off-site location (e.g., a factory). From there, each finished property section is then transported to the correct location and fully assembled on-site. Modular construction — already a common building method in other parts of the world — comes with various advantages, including improved safety measures for construction workers, bolstered building speeds and lowered project costs.

Hospitality spaces

The pandemic caused many individuals to refrain from activities that were deemed unsafe, such as going out to eat or traveling. Unfortunately, this change negatively impacted many businesses within the hospitality industry. Initial pandemic restrictions forced many restaurants to shift to takeout services, offer outdoor seating or close completely. Unable to utilize the majority of their commercial properties as a source of income, restaurants’ average sales are down by $65 billion from 2019’s pre-pandemic levels, resulting in the permanent closure of nearly 90,000 restaurant locations due to the pandemic.⁷ However, restaurants’ reopening efforts throughout 2021 and 2022 have helped bring customers back to their establishments and foster economic recovery.

Hotels experienced their worst year on record in 2020, with an average occupancy rate of just 44%, over 1 billion room nights remaining unsold and revenue per available room down 48%. However, the average occupancy rate saw slight recovery throughout 2021, with a 57% average occupancy rate.⁸ Although bookings have resumed for leisurely travel and vacations, business travel has remained low. In fact, business travel revenue is projected to be 23% below pre-pandemic levels in 2022, or $23 billion less than 2019.⁹ With this in mind, hotels may continue to encounter occupancy issues in the months and years to come.

Industrial spaces

Considering that many industrial jobs cannot be performed remotely, commercial properties that are industrial in nature (e.g., factories, warehouses, distribution centers and storage facilities) were not as severely impacted by the pandemic. These spaces remained heavily utilized, with plenty of industrial employees still having to come to work to perform their job duties. In fact, many industrial properties can expand their reach and create single facilities that house multiple types of businesses. For example, a shipment center can house offices and showrooms, lactation/mothers’ rooms, and gyms.

Amid the surge in e-commerce and the demand for quick last-mile deliveries, industrial properties will continue to grow. Consumers still desire same-day delivery, so more companies are investing in additional last-mile distribution complexes and drones.¹⁰

Navigating the evolving commercial real estate landscape

While each sector has experienced industry-specific property challenges due to the pandemic, the majority of businesses have at least one issue in common: 2021 and 2022 commercial real estate trends have resulted in vacancy concerns. When buildings become vacant, various exposures can arise. These issues primarily stem from the properties no longer being fully utilized, monitored or maintained. Key exposures include elevated building deterioration and utility breakdown risks, an increased likelihood of vandalism and theft, commercial property coverage limitations, reduced income capabilities and wasted expense concerns (e.g., mortgage payments and utility bills).¹¹ Therefore, it’s crucial for businesses that own commercial properties to take steps to keep their buildings occupied and avoid vacancy issues.

One of the most popular methods for commercial property owners to prevent vacancy problems is to repurpose their buildings. This entails making property adjustments to allow a building to be utilized for alternative operations than what it was initially built for. For example, a retail business owner who has transitioned to online sales may want to repurpose their shop into a warehouse or distribution center to accommodate e-commerce functions. In addition, a commercial property owner with an unused industrial space may want to repurpose their property into a habitational building — such as an apartment complex — for others to rent. Depending on their size, some properties can even be repurposed for multiple different operations. For instance, a 3-story building could feature a restaurant or retail space on the first floor, with habitational spaces on the second and third floors.

Yet there are several items to consider when planning to repurpose commercial properties. Specifically, not all properties can be repurposed, whether because of limitations from their original design or other factors. In particular, the additional liabilities of operating a property where people live can make it more difficult to repurpose a building into a habitational space. For example, the characteristics of shopping malls and office buildings probably would inhibit them from being repurposed into habitational properties. That’s why commercial property owners must conduct a thorough analysis of their facilities before making any repurposing decisions.

Here are some additional considerations to keep in mind when repurposing commercial buildings:

• Local regulations must be followed. Most municipalities have specific zoning ordinances. These laws determine which types of businesses are permitted to operate within certain areas. When repurposing their buildings, property owners should ensure that their updated spaces comply with all applicable zoning regulations. Also, property owners should confirm that their repurposed buildings follow all necessary life safety codes and National Fire Protection Association standards. These requirements may pertain to property features such as the number of exit and entry points, emergency lighting, evacuation routes and detection systems (e.g., smoke and carbon monoxide detectors).¹²
• Building utilities may require adjustments. . Properties’ utility needs are dependent upon their specific operations. As buildings are repurposed, their utilities may need to be adjusted to accommodate any functional changes. For instance, industrial properties repurposed into habitational spaces may need updated water systems because occupants use more water daily. Additionally, properties may have varying electrical needs based on the equipment and lighting fixtures implemented. Property owners should consult qualified contractors to determine the utility needs of their repurposed buildings.
• Updated fire suppression features might be necessary. When commercial properties are initially built, their sprinkler systems are designed to protect against their current fire hazards. Such hazards are determined based on the building’s occupancy and commodity classifications. Put simply, these classifications can be used to estimate how hot a fire could burn and how fast the flames may spread within a property. These classifications are selected based on the property’s operations and the types of materials stored within the space (e.g., plastics and combustible items). Because the building’s occupancy and commodity classifications will probably change when repurposing it into a new space, property owners will need to review their sprinkler systems to ensure that they can provide proper protection during a fire. Various elements of these buildings’ sprinkler systems may need to be updated (e.g., the water pressure or supply), while specific systems might need to be replaced altogether. In some cases, property owners will have to install new fire suppression features to protect their repurposed buildings (i.e., implementing automatic extinguishing systems above cooktops in restaurant spaces).^{13, 14}
• Insurance needs will probably change. Property owners who repurpose their spaces will probably need to update their coverage to reflect their current exposures adequately. It’s important to work with a trusted insurance professional amid the repurposing process to ensure proper protection.

It’s clear that the COVID-19 pandemic contributed to widespread changes and subsequent exposures for commercial properties. By understanding these concerns and taking steps to address them, businesses can remain successful in this ever-changing climate.