Impact of COVID-19 on Commercial Real Estate: A Deep Dive

by Greg Barrett

See my more recent post on the impact of COVID-19 on real estate.

I’ve been reluctant to express my thoughts on the COVID-19 pandemic. I figured there was no sense in taking the time to write something that may become irrelevant in a week. But, several of my readers have reached out asking for my thoughts; so I feel an obligation to share. In short, this terrible crisis has whacked several product types and will have a lasting, if not indefinite impact, on the commercial real estate sector.

The Carnage

This exogenous and unexpected shock to the economy has proven to be a devastating blow to some and a gut check to others.  Seemingly strong businesses have buckled under the unprecedented economic conditions, a consequence of stay-at-home orders and social distancing. Many businesses, which were slowly nearing the end of their life cycle, have been pushed toward bankruptcy (JC Penny, J Crew, Chesapeake Energy, Brooks brothers, Lord & Taylor, 24 Hour Fitness, Gold’s Gym, Hertz, Aldo, Cirque du Soleil, CMX Cinemas, etc.). In February, the economy was humming along with record low unemployment rates. A few months later, the US had the highest unemployment rate since the Great Depression. Besides grocery stores, shopping centers are nearly empty and many businesses remain closed.  Office buildings are no different. 

Education, healthcare, and real estate are the three industries likely to be most affected by the pandemic. For decades, these mature industries have resisted change and the adoption of technology and innovation. COVID-19 just rocked the boat. These industries now recognize that they need to change, they need to be more adaptable, and they need to embrace technology. We have been hit hard, but a healthy byproduct will be change. Change for the better. And change that I’m excited to be part of.

There are a lot of questions that we as CRE professionals are asking right now.  For example, will local restaurants and retail businesses make it? How many more businesses will fail? How many office employees will work remotely moving forward? Are people going to flee from gateway cities and head for more affordable parts of the country? Will people ditch the apartment/condo and head for a big house in the suburbs? Will we have to practice social distancing and wear masks forever? What’s going to happen to business travel and conventions? Will we ever go to ICSC again?

In my opinion, a form of some of these trends will likely stick.  For example, more office workers will have the option to work remotely either fulltime, or have the flexibility to work from home a few days a week. The emphasis on safety and sanitation is here to stay; people will continue to be cognizant of these issues and landlords will have to invest more in health and safety products.  I think we will see a small shift from the urban core to the suburbs, but I think this is more an acceleration of an existing trend.  I think that more people will try to move out of the gateway/overpriced cities like New York, Los Angeles, San Francisco, Seattle, Washington DC, Boston, Philadelphia and head for more affordable states like Texas, Idaho, Florida, The Carolinas, and other sunbelt destinations.  

This idea that we will continue to stay locked up indefinitely is faulty. At the end of the day we are social creatures. We thrive on human connection and interaction.  Once we develop a vaccine, or highly effective therapeutics, we will go back to being social creatures. Now that I’ve got that out of the way, let’s talk about how all this is impacting the commercial real estate space.

As with any major economic shock, there are winners and losers. In the wake of COVID-19, hospitality and retail are hurting more than other property sectors.  Data centers, self storage, industrial and distribution centers on the other hand, are emerging victorious.

COVID-19’s Impact on Tenants

Most important is the impact of the pandemic on our customers, our tenants. Things were humming along as usual, and out of nowhere, many tenants (particularly retailers) found themselves closed and without customers. It’s a challenge no one was prepared for.  During every other recession we have seen in our lifetime, businesses struggled but they continued operations and continued to generate revenue.  This time, many tenant’s revenues fell to zero in a matter of days.   Clearly, brick and mortar  retail tenants have been hit the hardest, while many technology companies have seen increased sales (Amazon, Facebook, Zoom, etc.). On the residential side, more renters are now unemployed than at any point in time since the Great Depression. Propped up by generous unemployment checks, the vast majority of renters have paid. It will be interesting to see if they keep paying when the transfer payments go away.

COVID-19’s Impact on Landlords

When tenants feel pain, they make sure their landlords feel pain as well. The majority of retail tenants told their landlords, either through their attorneys or CFO’s, that they cannot pay rent.  The notion that tenants have to make their contractual rent payments appears to have gone by the wayside.  Some tenants, despite strong balance sheets and the ability to make their rental obligations, have taken an opportunistic approach and demanded rent relief from landlords. They have taken an unprecedented position, one that we’ve never seen before, by simply stating that they would not pay rent. Has a company like Starbucks ever sent a letter to all of the landlords stating that they need help for the next year – I don’t think so. There hasn’t been a single time in recent history where thousands of companies simply decided they were going to effectively breach their lease agreements and avoid paying rent. Very little bothers a landlord more than a tenant, who can by all means make their rent payments, who seeks rent abatement just because they think they have the upper hand.

I’ve seen a new era in the landlord-tenant relationship.  Unfortunately for landlords, tenants have appeared to gain ground and obtain a larger sense of control. Despite what the contract says, tenants have been able to bully their landlords into providing them with rent deferment, and in many cases, rent abatement.  Tenants are currently in the drivers seat because they think that landlords are not in a position to boot them out. Most landlords would prefer to let a tenant limp along  than be left with an empty space.  Eventually these conditions will change and landlords will be able to exert more leverage, but until that time, tenants will continue to demand concessions whether they really need them or not.

The Pandemic’s Impact on Property Values

Property values dropped precipitously in April and May.  The all-property price index is down 11% from pre-COVID levels. An 11% drop in CRE values in just a few weeks is astounding.  I’ll break down each asset class below, starting with the largest drop in values since the onset of the pandemic:

  • Hospitality: -25%
  • Mall: -20%
  • Retail: -15%
  • Student Housing: -14%
  • Apartments: -10%
  • Net Lease: -8%
  • Office: -7%
  • Health Care: -7%
  • Self-Storage: -5%
  • Industrial: -5%

The above numbers are not surprising.  Travel came to a halt and likely won’t recover for several more years.  Malls have been mostly closed for months. Restaurants, apparel, gyms, theaters, and other retailers have been forces to close or reduce operations.  College students may not go back to campus in the fall and many apartment renters who are employed in the service sector and retail sectors are now unemployed.  Office workers have ditched the cube for their living rooms. Routine, elective, and many semi-urgent medical procedures have been put on pause.  Clearly these changes in the economy are reflected in CRE property values.  I’ll dive into each of the main food groups below.


The pandemic has hit the hospitality sector harder than any other. The pandemic caused business travel and tourism to come to a screeching halt.  Remit Consulting suggest that occupancy fell from 70% in early March to a low of 15% in early April. This immediate and profound drop is devastating for most operators. Fortunately, after bottoming out in April, occupancy has since increased to over 40%. Unfortunately,  40% occupancy is not enough to get out of the red as the breakeven point requires significantly better occupancy.  This is why you’ve seen so many hotels completely shut down for the time being.

This is the most challenging asset to price today because there is so much uncertainty. Several prominent CRE research firms indicated that they believe prices have fallen about 25% this year.   Drive-to resorts are doing much better than fly-to resorts.  A few of the drive-to destinations that are performing relatively well are Florida, Hilton Head, and Sedona.  Hotels that rely more heavily on business travel are going to struggle much more than drive-to destinations. Business travel likely won’t return until next spring, and possibly later if there is no vaccine. 

The experts have projected that demand for hotels will return to 2019 levels in 2023. One resource indicated that up to 20,000 hotel units in New York will permanently close.  With such a protracted drop in demand, many operators will be forced to call it quits. I believe we will see a very meaningful number of hotels shut down for good. 

I would only buy hotel properties that have a clear traffic driver and strong supply-demand characteristics. Hotels next to conference centers with a ton of nearby competition are destined to struggle, if not fail. Conferences will likely be permanently impacted by COVID-19 and the golden age of business travel has clearly passed. Businesses have found that spending all that time and money on travel did not have a profound impact on sales; therefore, companies will likely cut back on their travel budgets indefinitely.

On the other hand, a hotel with limited competition in a growing area and next to an expanding hospital or other driver may make sense.

An opportunity to keep an eye on, or consider if you have the skill set, is the conversion of hospitality product into affordable housing or multifamily. We will likely see a lot of distressed properties (B and C quality) coming to market at well below replacement cost pricing. Real estate entrepreneurs with entitlement and redevelopment expertise may be able to swoop in and buy these heavily discounted assets. They will then be able to reposition the property for the needs of the community, which will likely be multifamily or affordable housing.


Retail has been temporarily crushed by COVID-19.  Much of what I stated above, about tenants refusing to pay rent, was in reference to the retail sector.  Collections for shopping centers was around 50% in April but has steadily increased as  businesses have reopened. Shopping center collections increased from 61% in June to almost 70% in July–still terrible and unsustainable figures.  PPP funds helped, as recipients of those loans must use a portion of the loan proceeds toward rent.  With COVID-19 cases on the rise, restrictions have been reinstated in many parts of the country. This has forced some businesses to shut down a second time. If these conditions continue, we will see many more “For Lease” signs in spaces recently occupied by restaurants, nail salons, theaters, gyms, dry cleaners, or apparel stores. Retail spending dropped precipitously in March and has stayed well below average since. Retailers only have so much time before they run out of liquidity and can no longer pay their debtors.

Retail will continue to face significant headwinds. As I’ve pointed out in other articles, the US is over-retailed.  We have built way too many strip centers, power centers, and regional malls. Much of it needs to go away.  McKinsey estimates that a third of the 1,100 malls in the U.S. could end up being demolished. Some of it can be repurposed as it is well located, but much of it needs to be scraped.  Class-A properties in well-located areas with strong demographics and quality e-commerce resistant tenants will once again thrive in the post-pandemic world.  Properties in rural, poorly located areas, can safely assume their best days are behind them.

I would also stick to grocery-anchored centers, not just because they’ve performed well during the pandemic, but because they are poised to continue performing well. Grocery will continue to be e-commerce resistant because of the prohibitive economics of grocery delivery. In short, nobody can make online delivery in the grocery space pencil.  It’s great for the consumer, but it won’t take hold because the provider will always lose a significant amount of money on each transaction.

As a result, capital has stopped flowing to retail.  CMBS has dried up. All deals that would have closed after March have been put on pause.  Uncertainty around rent rolls and caution among lenders are the primary drivers of the pause on transactions. With so many tenants paying partial or no rent, how do you determine a property’s true NOI? With so many tenants running out of cash and/or being artificially propped up with government stimulus monies, how do we know who’s here to say and who’s not?  For those reasons, transactions are at a standstill. Transaction volume won’t recover until after we have a vaccine and things begin to normalize. Cap rates will likely expand because most institutional investors will want to reduce their exposure to this sector.

The Darwinian nature of retail has presented itself once again.  Retail trends that were present pre-COVID will only accelerate. Many tenants will fail and we will see another big wave of retail bankruptcies.  Retail has always seemed to evolve and remain healthy. In the past, when one retailer failed, it seemed that new retailers with more relevant business models took their place.  In many sectors, I don’t see that happening this time. This disruption is different because it is effectively accelerating trends that would have taken years to play out. I don’t see retail recovering like it has after past disruptions.  I don’t see new entrants backfilling all of the spaces left behind by those who succumb to the COVID-19 economy.  This time, much of the vacancy will not be absorbed, except in A-quality locations. I think we’ve hit a tipping point and I don’t see retail fully recovering.  The overbuilding of retail over the last 50 years has ended its run.

Regional malls with dark anchors will need to be repurposed; big boxes will need to be converted into last-mile distribution centers, entertainment uses, or redeveloped into housing. Derelict shopping centers must be torn down to make way for multifamily and townhome developments.  In-line retail space needs to be retrofitted into urgent care centers, radiology centers, or dialysis clinics.  Well-located retail, on heavily trafficked thoroughfares, need to be repositioned such that they can accommodate drive-thru operators.

On a positive note, there will be great opportunities in retail.  When capital leaves, prices go down.  Capital is leaving and prices will go down.  There will likely be many distressed retail assets in 2021-2022.  Some will be very cheap, but don’t just buy retail because it is cheap.  Only buy good real estate. Location, location, location will be more and more important to tenants. National tenants don’t care how cheap the rent is; they care about being in the best location in a given market and trade area.  If a property is not in a prime location, I would stay away from it unless it can be repurposed.  Don’t be fooled into buying low-quality properties because they are cheap.  With additional vacancy hitting the market, tenants will be able to locate where they want; if you aren’t where they want to be located, then you’ll struggle.

Student Housing

This product type will face major short-term challenges and likely long-term difficulties as well.  COVID-19 has upended our higher education system in many ways.  Most challenging for the student housing sector, is that many students will be doing their coursework online this fall.  Most universities are allowing a portion of the student body to attend in-person classes, but it appears that the vast majority of students will be taking their courses online, likely from their childhood bedroom to save on cost.  A return to normal won’t occur until after a vaccine, and even then it likely will not return to pre-pandemic levels.

The trend toward online and lower-priced options has, and will continue to accelerate due to the pandemic.   The Kahn academy, Udemy, Coursera and online courses from traditional universities will steal more market share and lead to lower on-campus enrollment numbers. Several liberal arts colleges have already filed for bankruptcy or announced that they will be closing their doors.  This shift will cause demand for off-campus housing to drop. I would be very cautious about making investments in student housing.  It is too early to tell how this sector will perform, even after a vaccine is produced. I would be very careful about housing near any second-tier university with declining enrollment. The student housing radius surrounding the campus is likely to shrink; therefore, I would be extremely cautious about Class A product that is not walkable. 


We benefit from interaction, sharing ideas, bumping into one another, and meeting in person.  I think we’ve all come to dislike Zoom meetings and would prefer to meet with colleagues in person.  However, most office workers have come to realize that they are productive and happy working from home. I don’t see a shift to full-time remote working for the vast majority of us. I believe that we would all prefer a hybrid approach: working 2-4 days per week from the office and one or more days from home.  Having worked from home for several months I have come to realize two things:  1) I can’t imagine never going into an office; and 2) I can’t imaging spending 10 hours a day, five days a week, in the office/car. I don’t want to be away from my family that much, and I don’t think it is necessary. I think a hybrid approach will likely become the new norm.

Office will likely struggle for the foreseeable future, particularly in areas that are over supplied.  The effects will not be immediate, but as leases rollover over the next several years, we may see a dip in overall demand for office space. Prior to COVID-19 we saw an increase in demand for suburban office, I think this will continue as sprawl will likely accelerate and people will want to work closer to home.

Office is interesting because we will likely see two opposing trends.  We will see a significant increase in remote work.  At the same time, social distancing measures will be taken to reduce the potential spread of illnesses in offices.  Shoulder-to-shoulder arrangements and dense cube farms will have to be dismantled and replaced with larger cubes or more private offices. This 10-year trend toward more office density (fewer square feet per user) will start to head in the opposite direction (more square feet per office worker).  The net effect of these two trends remains to be seen; however, I think that the net effect will result in a decrease in demand for office space.


Thus far into the pandemic, equity capital has been most interested in apartments, industrial, and life science. Apartment values have declined by approximately 5-10%. I don’t expect much distress in this asset class. Since there remains a lot of capital chasing US commercial real estate, multifamily will not see major declines in value because it is still a very sought after asset class.  From what I’ve seen thus far, industrial and distribution top the list of preferred property types followed by multifamily. 

Certain multifamily properties will likely face headwinds. I have concerns about properties that were bought when things became very frothy at the peak of the market.  Overleveraged properties may be in trouble if delinquencies rise, vacancy increases, and rents fall.  Properties with near-term debt maturities could face challenges as NOI could be below underwriting. I’ve spoken to a few operators who are able to find financing in today’s environment; however, access to capital is still a question mark moving forward.

We will likely see the acceleration of millennials moving into single family detached homes in the suburbs. We will likely see a slowdown of baby boomers downsizing and relocating to more urban areas.  The shift in these two trends will likely have a small impact on demand. Overall, the supply-demand fundamentals in most markets are still favorable. I would also suggest that developers consider larger floor plans that have some sort of office component, since more people will be working from home.


Despite a slight drop in values due to the pandemic, industrial real estate remains healthy. The pandemic will only accelerate industrial’s desirability as retail, hospitality, and office face long-term challenges. The pandemic has changed the way we shop; more money is being spent online than  before COVID which results in higher demand for the industrial/warehouse sector. I’ve already heard a number of institutional investors suggest that they want to de-risk and allocate more capital to industrial and warehouse.  I anticipate strong demand for industrial, low cap rates, and a strong development pipeline; both infill, as last-delivery becomes increasingly important, and in traditional industrial hubs.

Also, given the shock to supply chains during COVID (think toilet paper), companies may decide to diversify their supply sources or build up the “buffer stock” to quickly meet demand surges.  That would increase demand for industrial/warehouse space.  In short, I feel that industrial will quickly recover from this hiccup and emerge as the darling of the commercial real estate sector.

Despite all of my rosy remarks above, I do have a few concerns about industrial.  Anytime there is a recession or downturn, imports and exports decline. A decline in imports and exports results in a decrease in demand for industrial and warehouse space near ports and airports.  This is the one area of the industrial market that could face short-term challenges.

A Quick Word on Debt

Fortunately banks and other lenders are better prepared for this crisis than they were during the great recession. The shutdown has made it difficult for tenants to pay their rent; which results in landlord’s being unable to make their debt service payments.  Forbearance requests and elevated risk of mortgage defaults is the hot topic of the day.  It remains to be seen how much forbearance will be necessary and if lenders will decide to take back the keys–at this point lenders have no interest in taking back the keys so they have largely been flexible as it relates to forbearance.

A Few Things to Consider when Underwriting New Deals

There are two obvious challenges that those of us on the investment and asset management side of the business will face in the coming years. Because city and state budgets got upended by the virus, they will have to make up for the decrease in revenue, and increase in expenses. Unlike the federal government, state and local government’s have some incentive to be at or near a balanced budget. This will surely come in the form of higher property taxes.  Therefore, as you underwrite potential acquisitions, I suggest inflating property taxes because they will surely go up. Insurance costs will likely go up as well.  The cost of property and other forms of insurance have been rising steadily for many years. The COVID-19 pandemic will only add to that trend. Therefore, just like with taxes, I suggest you plan for increased insurance premiums as you are underwriting new deals.

Be Grateful for the Masters Degree

There is no doubt that this has been a difficult time for most of us in the CRE space.  Many CRE employees have lost their jobs or been furloughed.  Investors are worried about losing their properties or not having the liquidity to make it out of the crisis.  Real estate directors on the tenant side have lost their jobs or taken a pay cut.  Folks on the professional services side, like brokers, architects, and other consultants are struggling to find business and do deals.  It’s a tough time to say the least.

However, I would encourage you to consider this experience a masters degree in real estate. I won’t call it a free masters degree, because it has come at a cost, but what we’ve learned through this crisis is invaluable.  I would argue that what we’ve experienced, and what those of us in the thick of it have learned, is not something a textbook or course could ever replicate. Nobody was predicating a crisis like this.  Nobody had a game plan, and no textbook or course prepared us for the challenges we are overcoming.  The things we have learned over the last several months will benefit us for the rest of our careers.  I encourage you to write down what you’ve learned so that you can use it as a reference next time.

Investment Opportunities

The pandemic and the resulting economic collapse will lead to huge opportunities in the commercial real estate space. Keep in mind the following:

“The time to buy is when there’s blood in the streets.” – Baron Rothschild

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffet

“Don’t panic. The time to sell is before the crash, not after.” John Templeton

It’s hard to say where those opportunities are, since we are midway through this crisis (I think, but who knows).  Forbearance by lenders has kept many properties from going back to the bank. However, this may change after the election and into 2021. We will likely see a wave of defaults and distressed assets hit the market.  All I know is that there will be opportunities to pick up properties at very good prices. 

When considering an investment strategy, go where capital isn’t yet, so you can sell to them.  In other words, figure out where you think capital will be allocated in a few years, and buy those assets today.  When the demand for those assets increases, so will the value.

Final Thoughts

As I mentioned at the beginning of this article, commercial real estate is one of three major industries that will be significantly impacted by COVID-19 (healthcare and education are the others).  Change and disruption mean opportunity for those that embrace it and seek to innovate.  For those of us who are experienced, yet still relatively young, we have been handed an opportunity to grow and advance. I anticipate many senior positions will be filled by young, yet seasoned (30 somethings), CRE professionals who will bring new strategies and ideas to the table. My advice is to continue to educate yourself, to think strategically, to come up with new ideas and consider new approaches to solving problems (even if they may be crazy).  These qualities will drive you to success and prepare you to be a leader in this ever-changing industry.

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