Capital Max | How COVID-19 Affected Commercial Real Estate Values and Loan Defaults

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commercial real estate

Although it might look like the worst of the pandemic is over, commercial real estate continues to feel lingering effects. Prior to the pandemic, commercial real estate investment was a reliable venture, with businesses always in need of a physical space to operate. 

Unfortunately, the pandemic changed everything. The swift pivot to remote work, mandated by public health directives, has compelled many businesses to reassess their reliance on physical workspaces.

Many offices have been left vacant, plunging banks into millions of debts and mounting risks. This article is a breakdown of how the pandemic may have affected commercial real estate trends. It also looks at the way forward in terms of commercial real estate lending.

Impact of Covid 19 on Commercial Real Estate

Many sectors experienced a range of challenges as a result of the pandemic, and commercial real estate was no exception. Here are a few impacts of the pandemic on the commercial real estate sector.

Remote Work Is The New Normal

When the pandemic struck, remote work became a temporary solution to combat the virus, which required constant sanitation and a 6-foot-apart directive. This mode of operation offered many benefits, including lower commuting costs, increased productivity and work-life balance as well as slashed overheads. 

As a result, many organizations have permanently adopted this model, which has significantly translated to a reduced demand for physical workspaces. This change represents a significant disadvantage for banks that have issued large amounts of commercial real estate loan to businesses. 

A diminished demand for physical workspaces equates to a reduced rental income for commercial property owners. These reductions threaten the owners’ ability to pay up their loans, leading to loan defaults.

Immigration From Metro Areas

There was a high likelihood of contracting the virus in populated areas. As a result, people and businesses moved from busy metro areas to quiet and less-populated suburbs. 

The pandemic led to a shift away from urban areas, resulting in revenue losses and forcing many businesses to close. Although the economy has reopened, many businesses still struggle to recover their losses. The sudden drop in foot traffic and sales led to cash flow problems, making it hard for businesses to pay rent, loans, and expenses. 

Despite efforts to recover, many businesses continue to feel the impact of the pandemic, with some still at risk of permanent closure

Multifamily Units

As a result of the pandemic, there has been a shift in tenants’ priorities. Safety and health considerations have become a top priority, leading to an increase in demand for better protocols and technologies. 

Tenants are also seeking flexible lease terms that will allow for adaptability in case of the recurrence of the virus. Unfortunately, when the lease terms exceed their risk tolerance, one can expect the tenants to leave. This leads to an increase in the number of properties in the market.

The pandemic has also increased the number of landlords impacted by tenants who are moving to less populated areas. Additionally, some landlords are struggling due to tenants who cannot keep up with the rent. 

Decrease In Property Values

Due to reduced demand and increased vacancy rates, property values have decreased. This has led to a decrease in the collateral value backing commercial real estate loans, increasing the risk of loan defaults. Lenders have become more careful when giving out loans, and it has become more difficult for borrowers to secure new loans or refinance existing ones.

Government Policies And Regulations

Policies and regulations, such as foreclosure bans and eviction moratoriums, have affected the commercial real estate market. Although it was initially intended to support businesses and individuals, these policies and regulations have now created uncertainty for property owners’ management of their properties. Lenders also became more cautious in their lending practices, which led to reduced access to credit for commercial real estate borrowers.

Reduced Access To Credit 

The pandemic has profoundly impacted the lending landscape, with hard money lenders adopting a more cautious approach. This increased stringency has made it more difficult for borrowers to secure new loans or refinance existing ones. The resulting decrease in access to credit has had a significant impact on the commercial real estate market. 

Many borrowers, investors, and developers have found it challenging to get financing for property purchases, developments, or refinancing. Even borrowers with good credit faced stricter requirements and higher interest rates. The tightened lending standards delayed projects and increased costs. 

While some borrowers sought alternative lenders or financing options, these often came with higher costs and risks. The lending environment became more complex, making it harder for investors and developers to navigate the market.

How Commercial Real Estate Has Adapted Since The Pandemic

Inclusion of Amenities

Realtors are moving with the times in terms of social amenities. For example, before the pandemic, many people were interested in spaces like fitness centers, restaurants, and conference rooms. However, they now prefer amenities such as open-air environments or wellness facilities. 

Although it might be a logistically challenging project, landlords are now willing to consider the demands of their tenants and include some of these amenities.

Accommodation of Tenant Needs

Buildings are now being designed with the tenant in mind, featuring touchless entry points, improved ventilation systems, and enhanced cleaning protocols. This shift ensures that tenant welfare is a priority and attracts tenants who are seeking such safe environments. Property managers now invest smarter in UV lighting, air filtration systems, and other technology to reduce the risk of virus transmission.

Aside from these innovations, the pandemic has highlighted how rigid lease agreements can harm landlords. To accommodate the evolving landscape, landlords have been advised to adjust to short-term leases and agreements. These alternative agreements can act as a layer of protection for landlords whose tenants cannot meet their financial commitments.

Technology Adaptation

Prior to the pandemic, many property viewings were usually in-person. However, following the start of the pandemic, some companies have incorporated virtual viewing rooms with live links and product descriptions. Some of these properties are also equipped with innovative technology, such as sensors and smart lighting systems, to improve tenant experience.

Also, landlords and property managers now use data analytics to track energy usage, occupancy, and other metrics, enabling them to make data-driven decisions that can improve building performance.

Repurposing Vacant Properties

Real agents and landlords are now repurposing commercial real estate into residential areas. Since many businesses might not return to brick-and-mortar, it will be smart investing to reuse or redevelop these spaces adaptively. 

For example, an office workspace may be converted to affordable housing units—especially in places where housing is in high demand. It can also be converted into grocery stores or schools. This could be an opportunity for managers to appeal to retailers who might need space. 

Rise of Third-Space Developments

The pandemic has increased the trend towards third-space developments, which combine retail, residential, and recreational spaces in one project. This ensures community engagement and a live-work-play environment, which reduces the need for lengthy commutes. 

It also focuses on promoting vibrant communities that foster connection and provide a range of amenities that support the well-being of occupants. Third-space developments are also more resilient to economic downturns, as they depend less on a single-use or tenant.

Strategies For Real Estate Investment In A Hot Market

With low mortgage rates, many people will be looking to buy homes. However, not many will be willing to fix a house that needs a lot of work. This is where investors come in. This time is the best time to invest because while there is market appreciation, it makes the property accessible to sell, owing to the improvements you have made.

Investors can now uncover potential investments by researching debt-free properties and making direct purchase offers. If you can identify distressed properties and secure them at a discount, you can fix them up and resell them at a profit. Do not stall on this strategy—seasoned investors are already on the move, and the time to act is now.

Get On The Wave With Capital Max

If you are looking to secure a loan for commercial real estate or its reuse, look no further. Capital Max is here for you. We help you get a loan based on your equity and provide different offers for both new and established investors. We also have fast closing times and creative financing solutions tailored for you. Contact us today if you have any questions or need clarification, and you will be glad you did.