LOS ANGELES — After a horrible 2020 that saw many tenants fall behind on rent or go belly up, commercial property landlords are seeing signs of improvement this year, including a jump in hiring by restaurants, bars and retailers.
Still, the work-from-home and online shopping trends are expected to permanently reshape demand for office and retail space, says Hessam Nadji, CEO of Marcus & Millichap, a commercial real estate financing and advisory company.
Nadji recently spoke to The Associated Press about the state of the commercial real estate industry and its prospects for a comeback as the economy slowly emerges from the pandemic.
Q: 2020 was a rough year for commercial real estate, especially retail. How is that sector looking now?
A: We’ve seen a big surge in retail related confidence, both in what landlords are reporting in rent collections as well as buyers, who are now willing to look at shopping centers they weren’t willing to look at before. So retail is seeing this more immediate kind of pop in confidence and reopening benefits, especially when it comes to restaurants, bars and entertainment. Retail is feeling the healing cycle begin and it’s very encouraging.
Q: Will the surge in online shopping be a drag on retail space demand?
A: The e-commerce adoption and e-commerce prevalence has permanently been boosted by the pandemic. Experiential retail — movie theaters, fitness related retail, yoga — those were the best performing parts of retail, pre-pandemic. And post-pandemic, experiential retail is going to have a big boost because people are tired of being at home. Where you’re really going to feel the pain are things like furniture, department stores and other commodity goods that are so much easier to obtain through e-commerce.
Q: Are employers going to need less office space now that many employees have shown they can work well from home?
A: Office is probably impacted on a longer-term basis more than any other property type because companies have learned you can manage a workforce remotely, and people have learned they don’t have to commute to work every single day. On both the worker side and the employer side there’s an embracing of at least a partial virtual solution to employment. Is it going to be 50-50? Is it going to be 70% in office, 30% virtual? That’s anybody’s guess. My speculation would be 70% to 80% favoring coming into the office, but 20% to 30% becoming a permanent, virtual component of how we manage ourselves and our companies.
Q: How soon will we see this take shape and be reflected in vacancy rates?
A: In the next four or five years as current leases roll over, that’s when that’s going to show up. I don’t think there’ll be a massive change in the dynamics of office spaces five, six years from now, but I do think there’s a permanent effect for those who lived through the pandemic and learned from it.
Q: How has the pandemic affected your company?
A: Commercial real estate was in great shape, pre-pandemic. So it was all about the shock the pandemic created by the occupancies, especially in retail and hotels, plummeting and therefore investors really pulling back to see how bad it was going to get. We saw confidence return fairly quickly in the third quarter of last year and then really build up to, for us, a record fourth quarter.
Q: How are some of the other commercial property categories doing?
A: Fundamentals are holding up very solidly in self-storage. There’s strength in the industrial market, because of the modern warehouse distribution needs that major online retailers have and a lot of the old industrial product became functionally obsolete. So, there’s been a lot of new building that’s being absorbed very rapidly. Industrial vacancies are very low and rent growth is very high, despite the fact that we’ve built a record amount of new business in industrial. We’re seeing the most pain of course in hotels, shopping centers. Senior housing is going to take a while to recover as well, because of all the health issues and concerns people have putting their elderly parents now in care facilities.
Q: Do you expect the outlook for commercial real estate to improve now that the economy is reopening?
A: I’m fairly confident that unless there are additional waves or bad experiences that really take the wind out of the vaccination and normalization of the economy, improvement is not only going to continue it’s going to gain a lot of steam as we go into the second half of the year.
Questions and answers have been edited for length and clarity.