By Andres Nava, Managing Director at Metro 1
It’s been a bumpy ride through the year 2020. CRE professionals have had to evolve at unprecedented rates to survive the chaos of the pandemic, business shutdowns, market fluctuations, accelerated migrations, and a myriad of other factors affecting the industry over the past year.
The good news is: that year is over. And, if you’ve made it this far, you’re likely leaving 2020 behind with sharpened skills, hard-won lessons, and a new level of resilience that will serve you well over the course of your career.
We don’t know what 2021 holds, but we do know that it’s going to make for an interesting era in commercial real estate. The Metro 1 team of expert commercial real estate advisors in Miami, Florida, has been watching the market closely and these are our predictions for what we’re going to see in the industry next year.
Distressed Opportunities will Surface
COVID-19 has been unkind to many industries, but perhaps no industry has suffered as acutely as the hotel industry. As hotels have struggled with crippling profit losses, many are looking towards outside investment to either restructure their debt or buy them out altogether. According to the Commercial Observer, “Almost half, or 47.5 percent, of commercial mortgage-backed securities (CMBS) loans made against New York-area hotels were in special servicing last month.”
Looking to get in on the opportunities? The hotel industry is looking at a long road to recovery. Discounts of up to 50% of hotel valuations pre-COVID are expected within the next 12 to 18 months and could last until the travel sector sees a full-rebound, which most experts agree will not occur until the end of 2023 or potentially later. What should make the next year interesting is that investors have seen these opportunities brooding like a thundercloud in the distance, and have had plenty of time to collect their assets and strategize in anticipation of the rains.
Industrial is Heating Up
A new word we’ve added to our vocabulary in 2020 thanks to COVID-19 is “pandemic-proof.” While it’s a lot of buzz with less meat, what’s clear is that we have a renewed understanding of the term “essential good,” and therefore “essential business,” in a way that we haven’t since probably the Great Depression. During the pandemic, “essential goods” companies have not only survived but thrived. CNBC has estimated that the grocery sector alone has grown as much as 10% year over year, a historic gain. And, with the boom in demand for things like toilet paper, hand sanitizer, orange juice, bread, and the like — suppliers have required growing space for both manufacturing and logistics to keep up with the demand.
Chances are you’ve already seen a peak in interest in industrial spaces in your region. Warehouses, industrial lots, and last-mile logistics facilities are currently in short supply and likely will be through the end of 2021 and beyond. Companies like Amazon, FedEx, Kroger, Publix, and others have all posted record-setting profits in the billions of dollars, and, flush with cash, will be looking to scoop up the real estate that will give their growing operations a leg up.
What are companies — and investors — willing to pay a premium for? Class-A space, dock height, high-ceilings (30’ +), with convenient access to major transit hubs such as airports and highways.
Companies are Relocating
“The Urban Exodus” has been a catchphrase for several years now and has honestly proved to be more of an urban myth than a reality, as cities and urban centers have continued to significantly outpace suburban and rural areas with growth, attracting young talent and corporations alike. However, COVID-19 has brought about what is perhaps the closest thing to a manifestation of that trend we’ve seen yet — and it’s not just city-weary millennials who are packing up for cheaper homes and greener pastures.
Data giant Oracle, a Silicon Valley fixture, announced this year it would be moving its headquarters to Austin, Texas. Palantir, a publicly-traded software company headquartered in Palo Alto employing 2,500 people, is making the move to Denver. And there are countless other companies that have packed up shop in San Francisco or New York City to head for sunnier skies *and* lower real estate prices, elsewhere. The logic? If you’re going to be stuck at home, you may as well enjoy the view and have more than a pint-sized apartment to work from.
Miami, the hometown of Metro 1, has been fortunate to be on the receiving end of this migratory trend, welcoming technology companies, venture capital firms, and eCommerce companies in droves to the Magic City during the pandemic — most of them relocating from California and New York. One of the key draws? Commercial office space in Miami’s urban core averages about $20 less per-square-foot than similar space in San Francisco and New York City.
Even if office life begins to return to normal, companies, and the people that work for them, are not likely to forget the pandemic’s effects anytime soon. Not if, but when, another pandemic strikes — companies already know what works: limited or flexible office space, located in less-dense urban areas.
Opportunity Will Abound, for Those Ready
The market is flush with commercial inventory right now after the wave of closures brought on by COVID-19. And, it’s not just small business storefronts on Mainstreet that have been left vacant. While indie retailers and local eateries have certainly borne the brunt of COVID closures, major chains have also filed for bankruptcy and are looking to divest real estate assets, including JCPenney, J. Crew, Neiman Marcus, Ruby Tuesday, Steinmart, and many others.
This upheaval of businesses has left major pieces on the board in the real estate market across multiple tiers, unlike any conditions we’ve seen in recent history.
COVID-19 was a market condition, not even the world’s best economists could have predicted a year ago, so being “prepared” to buy up properties or finally launch that new brick-and-mortar concept in 2021 is more of a matter of chance perhaps than careful planning. But, investors, developers, entrepreneurs, and businesses who have the capital to spend are poised to gain significantly from the vacancies created in the past six months.
Corporations and concepts that are thriving and growing rapidly will likely expand, absorbing empty spaces left vacant in the big-box massacre. Likewise, new concepts, even concepts that have taken off because of the pandemic, such as ghost kitchens, will have their “pick of the litter” for opening new locations, especially if they are looking to lease. Budding entrepreneurs could be able to secure storefronts and restaurants in prime locations that would normally come with a premium price tag or be impossible to find at all.
The irony of this cocktail of circumstances is that competition among investors to scoop up commercial property at rock-bottom prices may actually drive those prices right back up. The takeaway? Have your strategy ready and move quickly on properties that fit the bill.
Oh, and don’t forget to work with a broker who truly understands your needs, and that is keeping pace with the rapidly changing market.
Contact us and learn more about our company at www.metro1.com.
