4C —April 24 - May 14, 2020 — Spring Preview — M id A tlantic Real Estate Journal
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D evelopment
By Jonathan M. Kristofich, NAI James E. Hanson How COVID-19 will reshape commercial real estate development
A
s we have seen in pre- vious economic down- turns there clearly will
do not reflect the new realities we face. Longer term, the effects will vary based on asset class. Some asset classes are primed to come out of COVID-19 stron- ger than ever, while others will struggle to adapt to the new normal. Industrial development will be the clear winner after the COVID-19 recession as the pandemic is further accelerat- ing changes in consumption that were already underway beforehand. E-commerce usage has exploded amidst lockdowns and quarantines, as many shoppers are now shopping on- line for the first time, growing
accustomed to these services and increasing their usage. The COVID-19 crisis is morph- ing consumer habits and the resulting increase in demand for warehouse and distribution space following COVID-19 will be high. Additionally, the va- riety of goods that consumers are now shopping for online, especially groceries, will require consideration of how to deliver more diverse inventories to the consumer from both a regional and more localized basis. Multifamily development will be mixed. After seven years of sustained new deliveries and positive absorption, the mul-
tifamily development pipeline remains robust. With numerous projects under construction, site plan approved or still in the entitlement phase, tens of thousands of units are poised to come to market throughout the region. However, multifamily rent growth has generally been flat for the past two to three years, due to fierce competi- tion and constant supply being added to the market. Low rent growth coupled with a deep pipeline of additional units in the queue will cause develop- ers, investors and lenders to take a pause on aggressive pursuit of new projects. We
anticipate stricter underwriting standards, which could make it much more difficult for projects to “get out of the ground” in the months to come. Projects still in the entitlement phase will be under pressure as buyers and sellers will contend over price adjustments, primarily due to the unclear path to eco- nomic recovery and prosper- ity, which affects demand and what renters can afford, and discuss extensions to approval contingency periods because of the current challenges to hold public meetings before local governing bodies. Office and Retail development will continue to be negligible and limited to build to suit applications for specific single tenant users or subtype asset classes such as medical office, drug stores and QSR catego- ries. In a post COVID-19 en- vironment the current modern design trends in multi-tenant office and retail space will be re-examined and altered in an effort to respond to the health crisis and reassure occupiers and customers alike that it is indeed safe to visit these spaces frequently and for long durations of time. In addition to redesigning space office, oc- cupiers will re-examine their space needs as both employer and employees adjust to work- ing from home. There will not be a mass exodus from office space, but a highly probable decline in demand. Conversely, traditional brick and mortar retailers struggling to survive pre-COVID-19 will go through a period of radical change and a series of restructuring events. Despite the outlook offered above, it will be tough to deter- mine the full extent of the fall- out from the pandemic because we are still in the middle of it. The total extent of lost rev- enues, unemployment, defaults, and stalled projects will not be fully understood for some time to come. Overall, even after the government mandates are lifted and society begins to slowly return to the new normal, COVID-19 will have a lasting impact on every asset class for years to come. Ultimately, re- storing the health and behavior of consumers will be critical to getting the economy moving again and place the commercial real estate industry on the path towards recovery. JonathanM. Kristofich is Associate Director of Capi - tal Markets at NAI James E. Hanson.
be winners and l o s e r s in the post- COV I D - 1 9 economy. The sho r t - t e rm e f f e c t s o f government- imposed re- st r i c t i ons
JonathanM. Kristofich
has pushed the pause button on almost all development projects, with a few “essential” exceptions. Additionally, deal flow is also in limbo because transactions, as contemplated,
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