3 commercial real estate lessons learned from COVID-19

The commercial real estate industry has experienced dramatic change since the onset of the pandemic. Remote work impacted the demand for office space; a surge in e-commerce was a boon for the industrial market, yet a damper for retail; low vacancies caused hotels to cut capital expenditures; and supply chain disruptions and materials shortages delayed multifamily projects and made them more expensive to build.

Amid these disruptions, which affected different regions of the country at different times, commercial real estate developers and investors have been resilient. To keep projects moving forward, they’ve accelerated the adoption of new technology, created more holistic risk management strategies and embraced the changing nature of office space.

Throughout the pandemic, Capital One’s commercial real estate team has been helping its clients with their financing and asset class investment needs. Three of the bank’s executives recently spoke with The Business Journals about three major lessons the industry learned from Covid-19.

The sudden shift to remote work has resulted in uncertainty about office space needs.

In the first quarter of 2020, Class A office absorption went negative for the first time since 2010. However, as the pandemic has worn on, many companies have turned to hybrid work models fueled by technology that empowers people to productively do their jobs from anywhere. This technology can also give employees a sense of workplace culture.

Specifically, the widespread adoption of online video conferencing has enabled companies to adapt to disruption quickly, so team members don’t lose the ability to connect with clients and one another. Some reports show seven years of tech progress occurred in a matter of months.

Despite the success of remote work, the office asset class isn’t down for the count.

John Hope, a senior vice president and head of originations for the West region at Capital One, said offices are still an attraction and retention tool for companies trying to navigate a tight talent market. That’s because office buildings with the live-work-play lifestyle amenities that employees desire are becoming part of companies’ brands and can serve as a recruiting tool.

According to Cushman & Wakefield, leading into the pandemic-induced recession, the biggest concern among CEOs was the attraction and retention of talent. “The workplace had become an extension of corporate culture, offering one of the first impressions for potential new hires and driving connection to the corporate brand and culture for existing employees,” an article by Cushman & Wakefield stated. Remote work caused many employees to struggle to connect with their company culture, the real estate firm reported.

“Major technology companies continue to make significant investments in office space, including headline acquisitions of large, Class A office buildings in gateway markets,” Hope said. “These are offices that are highly amenitized. So, while you are seeing companies continue to offer remote working opportunities, they are still investing in office space as a way to attract employees and separate themselves from competitors. This is part of a massive shift to reinvest where the talent is located, and we’re going to continue to see that.”

No one would have predicted a catastrophic health crisis prior to Covid-19. But companies that had holistic risk management practices in place were equipped to respond to the disruption while others scrambled. This approach doesn’t fragment risks among different functions or departments. Rather, it realizes all individual risks are interrelated.

According to research firm Gartner, the pandemic reaffirmed the business case for methods, processes, response thresholds and actions to protect enterprise goals, earnings and capital — what it refers to as “enterprise risk management.” Gartner found that an agile response occurred far more often when clear processes already existed to report and escalate absences or issues due to infectious diseases.

Mary Lucy Lester, a senior vice president at Capital One, said for real estate investors, risk management conversations are moving away from compartmentalized decision making. How a company performs means looking at how all areas of the company impact each other. For example, effective teams that can execute on a planned investment are teams that have been managed effectively, have the tools they need to perform in a remote or hybrid environment, and — as so many areas of life have been disrupted – have been given the flexibility they need to care for their children and home life.

Investors, she said, also are looking at how the operations of their properties impact the overall health of their companies. “They are asking, ‘What can we do at our properties to protect our tenants and prevent Covid from spreading,’” she said.

She observed that investors who don’t have an internal risk management function have often hired third parties to assess risk and develop an enterprise risk management strategy for the future.

According to Cushman & Wakefield, “Countless CEOs have stated that even if workers are in the office less than they were pre-Covid-19, the benefits of working together face-to-face remain critical for innovation, work quality, productivity, relationship building, culture and professional development.”

The future of office space doesn’t necessarily mean less footprint, but it may mean more open space where workers can safely collaborate. Offices will be built or reconfigured to be smarter, safer and more efficient, said Lou Rosado, senior vice president and New York market manager at Capital One.

Prior to Covid, Rosado said offices were trending smaller per square foot, per employee. That’s now changed. In addition to collaboration areas, the pandemic is causing office users to seek more space, so employees can spread out at desks or workstations and have more room for amenities.

Some of the amenities employees desire will be those that make workplaces feel safer, including touchless features, improved indoor air quality and enhanced cleaning protocols. In addition, some organizations are luring employees back to the office with outdoor seating areas, coffee and wine bars and high-quality dining options.

“You’ll see more office users adopt these practices that will help attract people back,” Rosado said. “A lot of change is needed inside offices so employees can feel safe and enjoy camaraderie with their peers when they return.”

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