The pandemic has changed the way people live, work, and play. From remote working to online shopping, these shifts have directly or indirectly impacted commercial real estate lending trends. For example, many have moved out of urban areas as remote work became the new normal. The rise of e-commerce has changed the demand for real estate in the retail and logistics industry.
Meanwhile, the success of the US vaccination effort will start to bring people back to in-person gatherings. The pent-up demand and high savings rate during the lockdown may lead to more commercial real estate activities. Lenders started to return to the market after the news about vaccination broke in Q4, 2020. The momentum has carried over into Q1, 2021, and still going strong. We expect an upward trajectory with commercial real estate lending in specific areas as the economy picks up and the outlook for various subsectors continues to improve.
What CRE Lenders Can Expect in the Second Half of 2021
While lenders remain cautious going into 2021, they are optimistic as we see financing volume continues to increase. Many are tapping into the changes in consumer behaviors and new workplace trends to refocus their lending strategies. Here are 4 commercial real estate lending trends to watch for:
The shift from in-person shopping to e-commerce during the pandemic reduced the demand for storefront spaces. But it increased the need for industrial and last-mile logistics facilities (i.e., dark stores) to support curbside pickup, same-day delivery, etc. As consumers are used to convenience, the shift, at least a substantial portion of it, will become permanent. Commercial real estate lenders should explore these opportunities — in particular, the demand for warehousing facilities close to population centers may rise due to retailers’ need to deliver the “2-day Amazon Prime” experience to meet consumer expectations.
While some workers will remain remote part-time or full-time, corporations aren’t giving up on their office spaces any time soon (e.g., Facebook has doubled down on its investment in New York City.) In-person interactions and collaborations spark innovation, which is critical for many tech companies to stay relevant. Meanwhile, most employees can benefit from working on-site with their co-workers, especially younger folks who are learning the ropes. We can also expect the rise of smaller-scale co-working or satellite office spaces in suburban areas to cater to (partially) remote workers — representing a new opportunity for commercial real estate lenders and investors.
The shifting balance between remote and on-site working will result in a change in urban demographics. This will, in turn, impact real estate demand. Many younger workers will return to or stay in cities when offices reopen. These renters will be looking for apartments that are smaller and more affordable but offer the convenience and excitement of city living. They may even prefer more amenities and larger common spaces over a bigger apartment, a more extreme example being “co-living” arrangements. Commercial real estate lenders should pay attention to urban developments that cater to this younger generation who value the experience and social aspect of urban living.
The rise in remote work made many city dwellers (especially those with families) rethink where they live. Many have packed up and moved to areas where they can get more space for less money. Commercial real estate lenders are seeing great opportunities in converting malls, factories, office buildings, and hotels into multi-family housing as the demand for housing rises and that for retail and office spaces change. Meanwhile, 93.6% of apartment households made a full or partial rent payment by the end of November 2020 — a good sign for lenders and investors.
The pandemic has caused many people to reconsider their lifestyles and priorities while leading corporations to adjust their strategies. All these shifts have resulted in a change in demand for retail, residential, and office real estate. For the rest of 2021, we can expect commercial real estate lenders to be more willing to finance and offer the most favorable rates on industrial and multifamily deals, which are considered to have the most stable outlooks.
While many things have gone digital, we still need physical space to support our activities. Sure, the demand for the type of commercial real estate has changed. But the demand still exists — there are many promising opportunities to be had now that we’re seeing a brighter economic outlook.