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COVID-19 Pandemic’s Impact on the Real Estate Industry

Geoffrey Kayton, CPA

4.8.20 | Berdon Industry Insights

With the effects of the COVID-19 pandemic wreaking havoc on markets around the world, it’s nearly impossible to forecast what any market will look like by the end of the year, and economic predictions from just a few months ago are almost irrelevant. This article will analyze some of the aspects concerning commercial and residential real estate and attempt to make sense of possible shifts within the industry.

In less than a month, a bustling U.S. economy has changed from daily commutes, traffic, and office-style working to an almost entirely virtual environment. It seems inevitable that this will cause drastic and long-lasting changes in the office real estate market, especially in major metropolitan areas. The impact of COVID-19 forces us to consider, among many other things, social distancing, large gatherings, and general hygiene – all of which are difficult to control in an office environment.

In the New York City real estate market, residential and office landlords presently struggling with the challenges of tenants who are unable to pay the rent will likely continue to struggle in the aftermath of COVID-19. The office market may experience more challenges due to many more people being able to work more effectively from home than were doing so just few weeks ago. Additionally, workers and companies are becoming more adjusted and accustomed to a remote working environment—increasing the probability of companies transitioning to a longer-term remote workforce and reducing market demand for office space.

Prior to the crisis, pressures on demand were already present, especially in the Manhattan office market, due to increased supply and prospective tenants generally favoring less square feet per employee and/or considering the use of flexible office space.

In the residential market, the longer-term adverse impact of the COVID-19 crisis is expected to be most significant in Class B and C properties and in New York City’s outer boroughs where the socio-economic impact of the crisis will likely be the greatest. While property valuations are surely taking an immediate hit as a result of the pandemic, the longer-term impact on values for both the office and residential market is much less certain and will be largely dependent on the length and severity of the crisis and its impact on the economy in general.

When asked about the state of certain real estate markets, on a webinar hosted by Bisnow, Mark Episcope, Co-Founder and Principal at Origin Investments, gave his opinion on what he thinks certain markets will look like going forward. His thoughts on the retail industry, which had already begun a secular decline, were not optimistic as he expects that the sector will be feeling the negative effects of this pandemic for years to come, most notably – malls. Regarding the residential market, Episcope acknowledged that there is a significant amount of uncertainty on how this segment will be impacted in the long-term. Although, he does believe that the multifamily sector will be boosted by this stay-at-home economy and the adaptation to teleworking.

Knotel’s Co-founder and Managing Partner, Amol Sarva shared his views on what this means for the future of real estate during a webinar hosted by Commercial Observer. His general sentiment was that the fallout from this virus will change our lives in many ways that we don’t yet understand. Mr. Sarva analogized anti-viral office environments with hospitals, which require regularly recycling air and the use of partitions. This led to the idea that people may be less likely to opt for a shared working environment, such as co-working, unless there are measures taken to reduce risk and disinfect areas between uses.

Given the drastic impact that the COVID-19 pandemic is having on the entire country, the real estate industry in major metropolitan areas, such as New York City, should expect the market landscape to look different than it did on March 1, 2020.

To aid the economy, the U.S. government decreased interest rates and launched a $700 billion quantitative easing program in mid-March. Then on March 27th, the $2 trillion CARES Act was passed in hopes of curbing the economic effects of this pandemic, but until we see some decline in the spread of the virus, it’s hard to know whether any additional government intervention will be needed.

Berdon is closely following developments from the Federal and state governments surrounding tax and filing relief as well as other economic programs being offered, such as loans through the Small Business Administration’s Paycheck Protection Program. During this difficult time, Berdon’s Real Estate Practice is doing everything it can to keep our real estate clients informed of the various options available to support their business continuity and financial relief.

If you are looking for help navigating the uncertainties that lie ahead, contact Geoffrey Kayton at 212.331.7525 | gkayton@berdonllp.com or reach out to your Berdon Advisor.