How commercial real estate survived the pandemic

CRE held up through the pandemic far better than most expected (iStock)

CRE held up through the pandemic far better than most expected (iStock)

Commercial real estate’s resilience through the pandemic hinged on its surprising flexibility and new focus on convenience — themes that will remain vital going forward, a report concludes.

The industry held up far better than most professionals expected at the outset of the economic shutdown in March 2020, according to Emerging Trends in Real Estate, a trends and forecast report published annually by PwC and the Urban Land Institute.

“By forcing people to work and live differently, the pandemic revealed hitherto unknown reservoirs of flexibility in how the property sectors could function — and changed expectations of how people will use properties in the future,” the report said.

To be sure, the retail and office segments experienced existential crises, and investors remain wary of those asset classes. But overall, the pandemic has had a “relatively muted” impact on commercial real estate fundamentals, the report said.

Survey participants attributed that resilience to tenants’ expectation that any downturn would be short-lived and, more significantly, to continued and unexpectedly generous government stimulus.

“Property markets that were once predictable will likely remain in a bubble of uncertainty, but decision-making confidence has improved since last year,” PwC and ULI said.

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Sun Belt cities including Nashville, Phoenix and Raleigh-Durham — primary beneficiaries of the pandemic’s big-city exodus — topped the list of markets with the best real estate prospects.

Commercial real estate sales fell during the pandemic, but not as precipitously as in previous recessions, the report noted. Domestic and international investors’ interest in U.S. real estate never really flagged.

“With low debt levels and relatively stable cash flows, borrowers continued to pay their mortgages, and distressed sales were few — to the shock and disappointment of many opportunistic investors looking for a deal,” the report said.

Survey participants named job and income growth as well as labor availability as key economic issues, and construction materials and labor costs as key for real estate.

Housing affordability and extreme weather were primary concerns.

“Despite broad recognition of housing affordability — especially for lower- and moderate-income households — as a serious matter that the real estate industry must address, the problem manages to get ever worse,” the report said.

PwC and ULI surveyed roughly 1,700 individuals across real estate and related professions for the report.

Contact T.P. Yeatts

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