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Pandemic’s impact on commercial real estate varying by sector

Pete Briskman

Peter Briskman, executive managing director and broker lead for the Maryland region of JLL, said certain segments of the commercial real estate market have benefited while others have been stagnated during the pandemic. (Submitted photo)

The pandemic has wreaked havoc on the commercial real estate market, according to national news reports that offer almost nothing but gloom and doom on the subject.

The Federal Reserve last year singled out commercial real estate as especially weak.

Bloomberg News has reported that retail real estate won’t bottom out until the middle of this year, and a roundtable discussion sponsored by NAIOP, the national Commercial Real Estate Development Association, concluded that the pandemic is having “a greater impact on commercial real estate than the global financial crisis of earlier in this century.”

Locally, however, experts see a more nuanced picture.

While COVID-19 has hit much of the commercial real estate market hard, they said, the damage so far has not been as great as many feared. Moreover, some sectors are doing better than ever.

“Certain segments of the market have benefited while others are experiencing stagnation,” said Peter Briskman, executive managing director and broker lead for the Maryland region of JLL, the international commercial real estate services company.

“Leasing velocity has picked up in sectors such as life sciences, health care and industrial, while suburban office is experiencing a drop-off in activity.”

“It’s been interesting on so many levels – fascinating, really,” said Trish Farrell, a senior vice president and principal with MacKenzie Commercial Real Estate Services in Anne Arundel County. “Obviously we’ve been impacted to some degree, but due to the stimulus packages and other things, it hasn’t been as bad as we anticipated it would be.”

Industrial, health care among bright spots

The commercial real estate market’s bright side, local experts said, includes industrial, life sciences and health care.

“Industrial is a bright spot in the market,” said Wei Xie, associate director for the Baltimore/Washington region of CBRE, a commercial real estate services and investment firm with offices in Baltimore and Bethesda. (Submitted photo)

“Industrial is a bright spot in the market,” said Wei Xie, associate director for the Baltimore/Washington region of CBRE, a commercial real estate services and investment firm with offices in Baltimore and Bethesda. (Submitted photo)

“Industrial is a bright spot in the market,” said Wei Xie, associate director for the Baltimore/Washington region of CBRE, a commercial real estate services and investment firm with offices in Baltimore and Bethesda.

“Warehouses and data centers benefited from the change in consumer behavior in retail with the boost of e-commerce retail,” she explained. “Industrial has emerged from the pandemic as the strongest commercial real estate sector, with decreased vacancy, increased rents and record absorption.”

The latest quarterly report from MacKenzie found that the industrial market “continued to weather the pandemic storm relatively unscathed.”  The Baltimore metropolitan market, the report found, saw 15 new industrial buildings, totaling 3.6 million square feet, delivered during 2020. The absorption rate, meanwhile, was a positive 5.2 million square feet, the report found, “at a time when it feels like everything else is vacant.”

As for the life sciences industry, pandemic-related developments such as Operation Warp Speed, the public-private partnership designed to accelerate the development and distribution of COVID-19 vaccines and therapeutics, have helped boost Maryland to a spot in the top four “life sciences clusters” in the nation, according to Briskman.

“Vacancy rates for lab space are currently below 4%, in comparison to office lease vacancies hovering as high as 20 percent in some sub-markets,” he said.

With health care, meanwhile, many hospitals and health care providers are taking advantage of vacancies in the real estate sector by leasing traditional retail space, such as big box stores, for medical uses, according to Tom Fidler, executive vice president and principal with MacKenzie.

“Hospitals have bounced back very aggressively,” he said.

Retail hard hit

At the other end of the spectrum, the hardest hit real estate market, by all accounts, has been retail.

The pandemic, noted MacKenzie’s quarterly report on the retail industry, has “shuttered the doors of many, from restaurants to big-box stores and in between. Effects will be felt for years to come, as the industry navigates a new norm and determines if 2020 trends in consumer habits and expenditures will be everlasting.”

Malls in the Baltimore market saw vacancy rates in the past year soar from 7.2 percent to 12.7 percent, according to the report.

But “not all was doom and gloom,” the report stated, noting that construction began on 23 new retail buildings in the region last year.

In addition, not all retail sectors have suffered. The pandemic, in fact, has been something of a boon for e-commerce, building materials, home and garden equipment and grocery, Xie noted.

Fidler said COVID-19 hit specialty and boutique shops twice as hard as most other retail sectors, many of which have improved in the past several months.

The area’s relatively high density of population and a similarly high level of discretionary spending have helped many retail outlets.

“I think we’ve turned a corner and bounced back in a very positive direction in retail,” Fidler said.

Office space a mixed bag

Mark Deering, senior vice president and partner with Mackenzie. (Submitted photo)

Mark Deering, senior vice president and partner with Mackenzie. (Submitted photo)

The office space market, meanwhile, has gotten a lot of attention during the pandemic, as many offices emptied out dramatically as people chose – or were required – to work remotely.

On the negative side, there has been a significant uptick in vacancy and decreased leasing activity, and many companies are expecting employees to never return to the office, at least full time. On the plus side, experts said, many businesses have come to realize the importance of employees working together, and already are designing office space that is safer – with less open spaces and more private offices, for example.

“This is going to be a two- or three-year experiment,” said Mark Deering, senior vice president and partner with Mackenzie. “Some companies are going to continue to do a lot of remote work. Others are not, because collaboration is more important than the risk of spreading the virus once people are vaccinated.  I see a number of trends in different directions.”

Those opposing trends and still-strong concerns about the pandemic make predicting the future of commercial real estate difficult. But at least one of the experts is optimistic – with a caveat.

“It feels like things are picking up and more business is being transacted and the fear that no one is ever going back into an office building or a restaurant – I don’t see that coming to fruition,” MacKenzie’s Farrell said. “Unless there’s another strain.”


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