There is little doubt that the post-pandemic commercial real estate market will look different than it did before COVID. Exactly how different it will be is difficult to say. However, there are many early indicators of change that provide some insights.
Landlord vs. Tenant perspective
While 71% percent of commercial occupiers say the shift to remote work has fundamentally changed their long-term approach to space usage, 69% of landlords see no lasting impact from COVID-19.
According to a survey of 200 tenants and 50 landlords from MRI Software and CoreNet Global.
The quote above is from a post in my LinkedIn news feed: “Office Tenants Expect Post-Pandemic Space Changes. Landlords? Not So Much”. So roughly 70% of tenants expect change while 70% of landlords expect no change. The article title reminds me of a line from the Dire Straits song Industrial Disease where one must be wrong (Tenant or Landlord). In most industries, the customer is right.
FIVE SIGNS OF CHANGE IN COMMERCIAL REAL ESTATE
Here are five signs that I have observed both locally and from various news sources which indicate a significant change in the real estate industry is underway.
Remote work – Within a few weeks of the start of the pandemic, everyone who could work from home was working from home. The rapid adoption of remote work due to COVID will likely produce a significant long-term structural change in the office space and retail sector. There is little doubt that the post-pandemic office and retail sector will look different.
Sub-lease market activity – Sub-lease activity is a sign that tenants are re-evaluating their office space requirements. However, I believe the sub-lease activity is an early indicator of long-term change. Tenants will value flexibility now more than ever, and this will impact the length of the term of leases.
Term of lease – COVID has fundamentally changed the tenant’s long-term plans for office and retail space. As a result, I expect landlords are going to need to adjust their expectations to accommodate demand. The net result will be a shorter, more flexible lease term. Therefore, changes to the term of the lease will have a significant impact on landlords.
Digital by default – Ottawa tech superstar Shopify adopted a digital by default policy and gave up 170,000 square feet of office space at Elgin Street HQ. Many other companies are adopting similar policies. The result of digital-first policies is the reduction of the amount of space.
Flexibility – My personal experience running a coworking and flexible workspace for ten years is that tenants don’t want to lease an office. What tenants want is a place to grow their business. As a result, tenants will demand higher levels of service and more flexibility from landlords. Commercial real estate companies are going to need to become service companies. (Coworking space operator TCC Canada breathes new life into Shopify’s iconic Elgin Street HQ). I expect there will be increased demand for Coworking and flexible space post-pandemic.
INSIGHTS INTO THE POST-PANDEMIC COMMERCIAL REAL ESTATE MARKET
The relationship between landlord and tenant will shift from low service long-term lease to a high-service short-term license. The industry standard of five and ten years lease terms will reset to more flexible arrangements of one to three-year terms. The migration from lease to license (Space as a Service) is a significant change to the real estate business model. In my opinion, the most critical effect will be on how properties are valued. Changing property valuations is the unstoppable freight train of change for the commercial real estate industry.
The pandemic may be a slow-moving black swan event for commercial real estate. However, the transition may usher in the dawn of a golden age for Space as a Service. There is no doubt that the post-pandemic commercial real estate market will look different from before COVID.