Where is CRE Heading in 2021?

It’s a New Year with Renewed Areas of Promise

With hope for the recently approved COVID-19 vaccines coloring the horizon like sunrise, the stock market ‘rewarded’ many upward-trending companies with a valuation downturn. Yet, while rising stars in the stay-at-home economy like Zoom, food delivery and premium exercise brands waned, industries hardest hit during the pandemic––hotels, airlines, cruise lines––saw the reverse.

Predictions are that the country will return to business almost as usual in 2021. It is expected that many in the workforce will return to the office and travel will pick up again.

Unfortunately, the turnaround is more complicated for commercial real estate. Whereas a software solution can adapt to market conditions rapidly, it takes considerably more time to transform a strip mall or high-rise office building into a multi-family or some other asset in high demand.

So, what is on the horizon for the commercial real estate industry in the next 12 to 24 months?

1. Office Space

The need for office space isn’t going away, but it will look different. Lenders will most likely see a shift in the type of office spaces for which borrowers are seeking loans. A higher percentage of applications for smaller spaces located in suburban areas will come across their desks.

As both employers and workers feel safer, many will want to return to the office––maybe not for a full week, but at least for a few days. And instead of commuting to campus or building where they come in contact with hundreds of coworkers, they will prefer a smaller office which translates into less risk.

2. Hospitality

Hotels and other hospitality players will see occupancies and sales rise as people begin to feel more confident. The public is certainly ready to make up for all trips canceled in 2020! It’s doubtful, though, that leisure travelers can make up for the decline in business travel, so many hotels will fail.

Although anything’s possible, lenders won’t see applications for hotels in the traditional sense. They may encounter opportunities for creative enterprises in the tourism industry like Getaway which builds “glamping” units on tracts of land within a short drive of urban centers.

Some statistics predict that up to 30% of restaurants will not survive the repercussions of stay-at-home orders and the like. It’s within reason to venture that there won’t be a rush for loans for new eateries unless they specialize in takeout options or serve up some other ‘safer’ fare.

3. Retail

In this sector, brick and mortar outlets will continue on a decline that had begun long before the crisis. While Amazon, Walmart, and other online giants overshadow the market, independent retail shops will struggle and big box stores may sit empty. Creative investors with ideas on how to repurpose those spaces will reach out to lenders.

4. ‘Dark’ Stores

After a year of pandemic-related adjustments, some trends are set to stick. One of these is the recent emergence of ‘dark stores’: retail establishments focused on last-mile distribution (curbside pickup, same-day delivery, etc.) rather than pedestrian traffic. Data shows that this is a convenience that consumers are going to be reluctant to give up, even after the pandemic is over.

5. Multi-family

Perhaps the most promising area for commercial lenders is multi-family projects. Many city dwellers will pack up and look for housing that’s more affordable. Conversions of malls, factories, office buildings, and hotels into multi-family living spaces are becoming more and more common as the industry works to supply demand. This trend is likely to continue through 2021 and beyond.

With so many changes to the CRE status quo, it’s more critical than ever for lenders and brokers to identify their ideal match based on their preferred lending criteria and more. Finance Lobby is poised to reimagine how CRE loans are made in 2022 and beyond.

January 18, 2021

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